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The Fed: Summers says Fed officials only need to ‘walk outside’ to know they’ve got it wrong on jobs and easy policy

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Former Treasury Secretary Larry Summers on Tuesday continued his criticism of the Federal Reserve’s easy policy stance, saying officials only need to “walk outside” to understand that the cornerstone of the policy — their concern for the labor market —- is misplaced.

The Fed has been buying $120 billion of asset purchases per month and has held its key interest-rate policy at zero to stimulate the economy. Officials have cited the fact that the labor market is still 8 million jobs below pre-pandemic levels as a reason to continue with the accommodative policy.

In a discussion at an Atlanta Fed conference on financial markets, Summers took aim at this concern.

“It is not tenable to assert today that in the contemporary American economy labor market slack is a dominant problem. Walk outside. Labor shortage is the pervasive phenomenon,” Summers said.

“Everywhere I look there are vacancies, people eager to fill the vacancies,” he added, referring to businesses, including restaurants and other service-heavy proprietors, challenged to find staff.

The outlook for monetary policy has changed over the past six months given the size of government spending to battle the pandemic, which has expanded the budget deficit by 15%, with another $4 trillion in the pipeline, Summers said.

As a result, the primary risks facing the economy now are overheating and risking asset-price inflation, he said.

Summers said the Fed’s latest forecast, released in March, showing no interest rate increase through the end of 2023 has created “dangerous complacency” in financial markets
SPX,
-0.05%
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This may do “real damage” to the economy if the Fed has to adjust policy quickly to combat inflation, he warned.

Summers, who was President Barack Obama’s first choice to lead the Fed but ultimately lost out to Janet Yellen, said he was reluctant to give specific tactical advice on how the Fed should reverse course.

“It should be done with care and gradualism,” he said.

But the path ahead was clear, he said.

“I think the prospects for avoiding turbulence over the next several years, both in the real economy and financial markets, would be substantially greater if there was a sense that monetary policy authorities in the United States were focused on the need to avoid overheating rather than focused on the need to reassure people that they won’t focus on overheating,” Summers said.

“I would rather see us go back to a Fed that is concerned about preempting inflation, rather than a Fed that is concerned about preempting fears that it will be concerned about inflation,” he added.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.646%

was only slightly higher in trading on Tuesday. The yield had a sharp rise from below 1% over the first quarter. It has been rangebound since mid-March.

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