Tom Williams, Pool via AP
Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee, March 3, 2022, on Capitol Hill.
The Federal Reserve, as expected, began raising interest rates at the two-day meeting of its Open Market Committee that ended today. This afternoon, the Fed announced a quarter-point hike in the short-term interest rate to the target range of 0.25 to 0.50, to be followed by other rate hikes as conditions warrant.
The vote of the committee was 8-to-1, with only St. Louis Fed Chair James Bullard calling for a half-point hike. This mild policy response had been widely anticipated. The Fed chair, Jerome Powell, had previously stated on March 2 that he favored no more than a quarter-point hike for now.
Mercifully, the Fed did not follow the loudly blared advice of Larry Summers, who has been on a vendetta against Powell. In his latest screed, in Tuesday’s Washington Post, Summers called for massive rate hikes and a deliberate increase in the unemployment rate to slow inflation.
“The Fed’s current policy trajectory,” Summers wrote, “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.” Summers called for “rates of 5 percent or more—something markets currently regard as almost unimaginable.”
Well, yes. Rates that high would slow inflation—by creating the very major recession that Summers says he wants to avoid.
The flaw in Summers’s analysis is that the current inflation is not the result of ordinary demand overheating, much less wage pressures. We have had a series of supply shocks, compounded by a war.
Artificially engineering a recession will not cure these extraneous factors. It will cause neither more oil nor more semiconductors to materialize. Nor will a punishing rate hike cause more affordable housing to materialize. On the contrary, tight money will make construction and mortgages more expensive.
Summers’s animus seems driven partly by the fact that he keeps badgering Powell, in one op-ed after another, and Powell keeps prudently ignoring his advice; and partly by the fact that Powell has the job of Fed chair that Summers has long coveted.
Summers’s own track record on recession and inflation suggests that this is not an economist whose advice you’d want to follow. In early 2009, as Obama’s top economic adviser, Summers lowballed the scale of stimulus that the economy needed. Then, in early 2010, Summers led Obama’s premature pivot to deficit reduction, condemning the economy to years of excessively high unemployment and wage stagnation.
There are no easy choices in today’s economy, but plenty of bad ones. Powell deserves credit for ignoring the perverse advice of the inflation hawks.
