Ex-Treasury Chief Urges Fed to Admit It Can’t ‘Have It All’ Amid Low Unemployment Expectations
© AP Photo / Andrew Harnik
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Even though the US Commerce Department has reported two consecutive quarters of negative economic growth, the Biden administration continues to maintain the US has not entered a recession, pointing to other strong economic numbers. The political repercussions of an economic downturn could deliver Congress to the Republicans in November.
Wall Street stocks tumbled on Monday amid fears the Federal Reserve, the US’ central bank, could raise interest rates again next month. Fed Chair Jerome Powell is slated to speak on Friday at the Kansas City Fed's annual Jackson Hole symposium and lay out an economic strategy for tackling the record-high inflation without driving up unemployment, which is presently at a historic low.
“My worst fear would be that the Fed will continue to be suggesting that it can have it all in terms of low inflation, low unemployment and a healthy economy,” Harvard University professor Lawrence Summers told Bloomberg on Monday.
Summers, who was deputy and then full Treasury Secretary under then-President Bill Clinton and is a former chief economist for the World Bank, has long been a critic of Powell and his handling of inflation during the COVID-19 pandemic.
Following the March 2020 crash that accompanied the first and strictest COVID-19 lockdown, Powell made the controversial decision to tolerate increasing inflation if it was accompanied by employment expansion. He wrongly believed the inflation would be moderate and temporary, and the Fed only moved to tackle the problem in early 2022, when the Bureau of Labor Statistics reported the worst inflation in 40 years.
The Fed has tried to quell fears that by raising interest rates, the central bank could trigger a recession and a rise in unemployment, but Powell has used phrases such as a “soft or ‘soft-ish’ landing” for the desired result. Meanwhile, corporations like Bank of America are welcoming the reports of increasing joblessness, seeing it as a solution to their falling profits.
“The reality is that it’s probably not so realistic to think” the Fed will “get inflation all the way down without unemployment up - and they don’t want to acknowledge that,” Summers said on Monday. “That forces a certain confusion into all of their statements.”
Summers has previously said the Fed’s projection that unemployment will rise from its present 3.5% to just 4.1% by 2024 is not realistic, and that the US needs 5% unemployment for five years, or “two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment” to halt the record inflation.
However, his projections don’t take into account that corporate profits accounted for 54% of inflation over the last two years, according to an April study by the Economic Policy Institute. The Inflation Reduction Act that US President Joe Biden signed into law last week acknowledges this fact by increasing the corporate minimum tax on firms that earn more than $1 billion per year, but only modestly so.
