Larry Summers: Policy Decisions Have Put the US Economy on a ‘Problematic Course’

Despite the Fed’s repeated efforts to brush aside growing inflation concerns even as Americans across the country are seeing their pocketbooks erode with each passing CPI print, former Treasury Secretary Larry Summers concurs that the US economy, is indeed, headed towards a “problematic course” with its bottomless liquidity injections.

The Harvard economist and former Treasury secretary recently warned that inflation levels will surge to approximately 5% by the end of 2021, which will result in a jump in bond yields throughout the remainder of the year. Summers has frequently warned that the Biden administration’s and the Fed’s generous fiscal and monetary policies coupled with the reopening of the economy will cause a surge in price pressures, while the Fed has repeatedly argued that any inflation that does arise will only be temporary.

Indeed, the latest CPI print has accelerated to an annualized 5% in May, and although the Fed acknowledged that price pressures may be higher than expected, Chairman Jerome Powell stated that they are only transitory and will subside once the labour market reaches full utilization. However, Summers once again warned that the current policy decisions are likely going to cause significant harm to the wellbeing of the US economy.

According to an interview with Bloomberg, Summers took issue with the current historically low interest rates and ballooning budget deficits during a period of “an epic degree of labour shortage.” The former treasury secretary compared the current state of the economy to a vehicle driving 100 miles per hour down an empty highway, warning that the road may not always be empty. “I don’t know what form the accident will come, but when you’re driving 100 miles an hour, it’s probably not actually the fastest way to get where you’re going, because you’re likely to have some kind of dislocation,” he explained.

Instead, Summers suggested that a shift in policy should occur, in order to address the potential risks stemming from soaring liquidity and the possibility of asset bubbles. “I’d like to see signals that overheating liquidity and bubbles are now seen as major risks facing the American economy.” However, Summers also cautioned that addressing the economic threats could also lead to “volatility and upset” in the short-run.

Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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