Former US Treasury chief warns against complacency in fight with inflation

Lawrence Summers says Fed should continue raising interest rates to bring inflation down to target

Inflation in the US is still above target, former Treasury secretary Lawrence Summers says. AFP
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Former Treasury Secretary Lawrence Summers warned against complacency from policymakers in bringing inflation down from its peak last year and predicted a further sell-off in bonds as investors adjust to the need for more monetary tightening.

“Nobody ever thought we were an underlying 8 per cent inflation country,” Mr Summers said on Bloomberg Television’s Wall Street Week with David Westin.

“So, the fact that the rate has come down shouldn’t be confused with saying that ‘we can be confident that we’re on a path of this all being OK.’”

Mr Summers spoke hours after Friday’s US jobs report, which he characterised as a “hot” set of numbers, with a payroll gain of 209,000 for June that was effectively double the growth of the adult US population. The release also showed a bigger-than-expected advance in wages, to 4.4 per cent for the year through to June.

Other strong data include a strengthening in the housing market and improving consumer confidence. While some indicators have suggested signs of a softening in the economy, the bond market has sold off in the expectation the Federal Reserve will have to raise interest rates further.

Two-year Treasury yields on Thursday hit their highest level since 2007, surpassing 5 per cent, while five-year yields headed towards the 2007 highs hit in October. Futures prices indicate the Fed will increases rates at least once more this year.

“You’ve seen an appropriate adjustment in medium-term interest rates to this reality” of the Fed’s need to do more, said Mr Summers, a Harvard University professor and paid contributor to Bloomberg TV.

“My best guess is that you’re going to see further adjustment as the data continues to come in.”

Next week, the consumer price index is forecast to show a fall in the headline annual inflation rate, with the Bloomberg survey suggesting a 3.1 per cent pace for June. That would be down from 4 per cent in May and a peak above 9 per cent in June 2022. The core rate, excluding food and energy, is forecast for 5 per cent.

US Federal Reserve raises interest rates for tenth consecutive time

Jerome Powell, chairman of the US Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, US, on Wednesday, May 3, 2023.  The Federal Reserve raised interest rates by a quarter percentage point and hinted it may be the final move in the most aggressive tightening campaign since the 1980s as economic risks mount. Photographer: Al Drago / Bloomberg

The Fed’s target is for a 2 per cent inflation rate, using a separate gauge known as the PCE price index. In May, that was up 3.8 per cent from a year before, or almost double the policymakers’ goal.

“Since we haven’t yet had a significant slowdown in economic activity, it shouldn’t be surprising that we’ve still got inflation well above target,” Mr Summers said.

As for monetary policy, the best guess has to be that “if the Fed wants to see inflation get back to its target, it’s going to have to raise rates enough that, at some point, the economy suffers a downturn,” he added.

Updated: July 09, 2023, 5:00 AM