Why Washington Can’t Give up Listening to Larry Summers

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In early June, the New York Times surveyed the economics departments of a handful of universities with notable economics programs – Princeton, Harvard, Berkeley, the University of Chicago, the Massachusetts Institute of Technology, and Ohio State University – and many academics shared Mr. Summers’ concerns. A sizable minority said they fear inflation will skyrocket. And about half of the respondents who work in macroeconomics agreed that the latest stimulus package was “significantly” too big.

That is the look into the academy. The message from the economists currently in power is different. Top Fed officials have said that high inflation is unlikely and that they expect temporary data gaps and bottlenecks to go away.

“A pretty substantial part – or perhaps all – of the inflation overshoot comes from categories directly affected by the reopening of the economy,” Fed chairman Jerome H. Powell said during the June 22 congressional hearing.

The White House also accepts that inflation could rise too high, a point the Biden economics team made more explicit after Mr Summers raised its concerns. But that’s not their prediction, and it wasn’t enough to prevent them from surpassing their $ 1.9 trillion stimulus.

Nor did the Fed sensibly dissuade them from their patient course: Mr. Summers regularly asked the central bank to stop buying mortgage-backed bonds. While the Fed has said it is now talking about slowing these purchases, it has not yet done so. Fed officials at their June meeting hinted at possible rate hikes for 2023 and raised their inflation estimates for this year.

Mr. Summers comforts the recent attention the Fed has paid to inflation risks. Before that, however, he had said that there was a third chance the Fed would let inflation spiral out of control, a third chance of sparking a recession by raising interest rates to contain price gains, and a one chance Third, that everything would turn out well – and he still thinks the assessment is fundamentally correct, he said in an interview.

Mr. Summers might be right. Inflation has risen faster this year than economists expected. But it could still turn out to be wrong, as part of the price hike was widely expected and the rest came from categories hit by reopening wobbles, like airline tickets and used cars. If price gains align again after a bout of pandemic weirdness, the Fed believes there is little reason to be destabilizing or problematic.