Former Obama economic adviser Larry Summers argued that the Federal Reserve's current policy trajectory in handling inflation will likely lead the U.S. to a period of stagflation and a 'major' recession, and called on it to make drastic changes.
"I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely," Summers wrote.
"The Fed’s current policy trajectory is likely to lead to stagflation, with average unemployment and inflation both averaging over 5 percent over the next few years — and ultimately to a major recession," he added. Summers argued, citing research he conducted with a colleague at Harvard University, that overheating conditions of high inflation and low unemployment, both currently facing the U.S., are usually followed by a recession.
He noted various errors he felt the Fed had made over the past year when addressing inflation, including predicting it would remain in the 2 percent range and be transitory, and continuing to buy mortgage-backed securities despite house prices increasing more than 20 percent. "No explanation has been offered for these rather momentous errors. Nor is there any suggestion that the Fed forecasting procedures or the personnel that produced them will change," Summers wrote."Indeed, the most important change in the March Monetary Policy Report to Congress was in the wrong direction — the removal of the discussion of the various monetary policy rules that had suggested policy was dangerously loose.
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