Summers urges Fed to deliver stark message on economic pain

Former Treasury Secretary Lawrence Summers called on the Federal Reserve to deliver a clear message saying it will need to impose “restrictive” monetary policy that drives up the U.S. unemployment rate in order to quell inflation.

“My worst fear would be that the Fed will continue to be suggesting that it can have it all in terms of low inflation, low unemployment and a healthy economy,” Summers told Bloomberg Television.

Summers was asked what he was most concerned about with regard to this week’s annual economic conference at Jackson Hole, Wyoming, where Fed Chair Jerome Powell and other officials are slated to speak.

Any move to continue assuring that inflation can be defeated without much pain would leave people “very much in doubt about what lies ahead” and could do “further damage” to Fed credibility, said Summers, a Harvard University professor and paid contributor to Bloomberg Television.

“The reality is that it’s probably not so realistic to think” the Fed will “get inflation all the way down without unemployment up — and they don’t want to acknowledge that,” Summers said. “That forces a certain confusion into all of their statements.”

Summers has consistently criticized the Fed for projecting that unemployment will rise to just 4.1% by 2024, saying instead that it will likely need to punch through 5% from the 3.5% level seen in July. He has also taken issue with Powell’s assessment that the Fed’s policy rate — at 2.25% to 2.5% today — is around the “neutral rate,” where it neither restrains nor stokes inflation.

At Jackson Hole, “My hope is that we will get clarity that policy is not yet restrictive, that it needs to be restrictive if we’re going to contain inflation, and that we’ll need to accept the consequences of that,” Summers said. He added that he hoped “that that message will be delivered starkly and clearly.”

Summers, who has also served as director of the White House National Economic Council, also indicated that the rebound in financial markets since mid-June is effectively running counter to the Fed’s inflation campaign.

“It’s got to worry them that financial conditions are now materially looser than they were when the Fed last met,” Summers said. “When, in the middle of a tightening cycle, financial conditions are substantially loosening, that has to make a central bank nervous.”

The former Treasury chief drew little optimism from data showing the headline inflation rate is coming down. The consumer price index was flat in July from the previous month, while so-called core prices — which exclude food and energy — rose 0.3%, data showed earlier this month.

“I don’t see that we’re making any great progress with respect to core inflation,” Summers said, pointing to continued strong gains in wages and in so-called trimmed-mean inflation measures, which strip out the most volatile elements each month. “We’ve still got a substantial inflation challenge ahead of us.”