High interest rates and persistently high inflation – and its impact on the global economy – has been the focus of investor attention in recent weeks in all markets.
The Federal Reserve Its two-day meeting begins on Tuesday, while the UK, Norway, Switzerland and Japan will hold monetary policy meetings this week.
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Wall Street behaved in that sense on Tuesday, with a nearly 1% drop in major indexes, as investors took positions waiting for new economic forecasts and another big rise in reference prices. All with a purpose It stifled inflation that had reached its highest levels in several decades.
Averting Disaster: The Ex-Treasury Secretary’s Inflation Warning
Faced with this scenario, former US Treasury Secretary Larry Summers warned that “the The Fed needs to keep raising interest rates To crush inflation, and so Avoid economic disaster.
“We have a major core inflation problem that will not be resolved without very significant monetary tightening,” the economist told Bloomberg on Friday.
Summers, a professor of economics at Harvard University, served as Secretary of the Treasury under President Bill Clinton and Director of the National Economic Council under President Barack Obama.
Former US Treasury Secretary Larry Summers.
The former official noted that core inflation grew more than 6% in August. There has also been a significant increase in the cost of housing components; And a sharp rise in wages for workers who change jobs, which means an increase in prices and final services.
At the same time, he highlighted that the rate policy that the Fed had to implement was clearly understated from the start: He noted that 15 months ago, markets expected rates to remain close to zero by mid-2023. Whereas they are now pricing in potential increases from the current 2.5% to 4.5% for the summer season..
What should the Fed do?
Summers told Bloomberg that if the Fed was serious about cutting inflation, You won’t be surprised if prices go over 5%..
Thus, according to Business Insider, if the US central bank rises too slowly or pulls back in its fight against inflation, The result may be stagflation: A devastating combination of slowing economic growth, high inflation and rising unemployment.
The Federal Reserve It applies quantitative tightening, i.e. reducing assets in its balance sheet.
“History records many, many cases where inflation policy adjustments were excessively delayed, and that had very significant costs,” he said.
Finally, the former Democratic official emphasized that a large part of the inflation process that the United States goes through will depend on whether markets tend to set prices, Oil prices are still low Or even less so, the warning about the significant geopolitical component on which this problem depends.
