Summers Says Low Inflation Is Biggest Challenge for U.S.by
Fed should delay lifting rates again as growth outlook shaky
GDP before adjusting for inflation would be better guide
The biggest challenge for the U.S. is getting inflation to move toward the Federal Reserve’s goal, former Treasury Secretary Lawrence Summers said, adding that the central bank should put off raising interest rates again.
It’s a new world “where the challenge is not excessive inflation, the challenge is getting inflation up to 2 percent,” and markets don’t believe that can happen in the next decade, Summers said in a Bloomberg TV interview on Thursday. It “will be constructive” for the Fed to reconsider boosting borrowing costs again soon.
The U.S. central bank in December raised rates for the first time since 2006, and indicated further moves will be gradual. Forecasters, who had penciled in four interest-rate increases this year, are now pricing in barely any hikes.
If the central bank is indeed data-dependent, policy makers would not stick to their December 2015 view, which is looking very “shaky” these days, and would not move forward with the kind of rate increases that they planned at that time, Summers said.
One way is to ensure that gross domestic product, before adjusting for inflation, is growing at a fast enough clip, he said. Thus the Fed should consider focusing on so-called nominal GDP to help guide monetary policy. Such an approach would have helped the central bank to better gauge the extent of weakness in the economy given that inflation has remained low, and accordingly provide policy support for growth, he said.
“It’s worth thinking hard about whether the Fed should target nominal GDP,” Summers said. “If we had done that, we would have been even more concerned through the last five or six years about where we were, and it would have imparted a stimulative bias to policy.”
The Fed’s mandate now is to promote maximum employment and stable inflation, which they say would be around 2 percent. The central bank doesn’t target GDP.
Fed policy makers debating their outlook for interest rates last month expressed concern that the fall in commodity prices and the rout in financial markets posed risks to the economy, according to minutes of the Jan. 26-27 meeting released Wednesday.
In the past few years, the Fed has been “too optimistic” about growth each December, and has been off the mark by an “average of three quarters of a point,” Summers said. Policy makers need to rapidly adjust to the “new paradigm of excessive savings relative to investment, what I call secular stagnation.”
Clarifying that he doesn’t expect the Fed to switch to nominal GDP targeting immediately, he emphasized it should be considered.
Substantial spending on infrastructure, corporate tax reform and bringing back some of the $2 trillion in company earnings kept abroad would also help spur private investment and contribute to growth, Summers said.