Former US Treasury Secretary Larry Summers said on Tuesday that the growing chorus of economists and politicians urging the Federal Reserve to halt its aggressive rate hikes to fight inflation is misguided. Those critics say the Fed could put the economy into recession, but Summers argued that there is a far greater risk to the economy that the Fed does not do enough to lower prices.
“I look at economic history and I see that there are many times when the Fed didn’t do enough and so inflation accelerated again, but I can’t find any time in the last 60 years when the Fed did too much.” Summers told CNN’s Wolf Blitzer on “The Situation Room.”
“Even if there is a downturn or a recession, I don’t think there’s any reason to think the Fed has any real chance of pushing inflation down durably. [their stated inflation goal of] 2% without much more action,” he said.
Summers added that his best estimate is that interest rates would need to rise to 5.5% “if we are going to have a meaningful prospect of restoring inflation to the target level that the Fed has said it is committed to.” The reference rate for central bank loans is currently between 3% and 3.75%.
The US economy has been showing warning signs of an upcoming recession for months. Several economic leaders, including JPMorgan Chase CEO Jamie Dimon and Amazon founder Jeff Bezos, have said they are concerned a recession is imminent.
The markets, meanwhile, have fallen significantly this year. Summers agreed that it is much more likely that there will not be a recession in the coming year, and encouraged Americans to recognize that “there may be more difficult times ahead.” He suggested that those concerned about preparing for the recession should make sure not to max out their borrowing capacity and avoid taking financial risks.
About oil taxes: On Tuesday, Summers also pushed back after President Joe Biden floated the possibility of punishing the oil industry for high prices by imposing a windfall tax.
Biden on Monday denounced the staggering profits of Big Oil and raised the possibility of pursuing tax penalties if oil and gas companies do not invest more aggressively in new supplies to lower prices.
“The record profits today are not because they are doing something new or innovative. The profits are an unexpected war,” Biden said from the Roosevelt Room, alongside Treasury Secretary Janet Yellen and Energy Secretary Jennifer Granholm. “Enough is enough.”
Summers, a prominent Democratic economist and senior adviser to Presidents Bill Clinton and Barack Obama, has at times been a vocal critic of Biden.
“I think the fear is that if we established that every time the price of oil went up substantially we were going to impose a windfall tax, the incentive to drill for oil would be reduced. That’s because you wouldn’t feel like you could get the full reward of your oil when it was really needed,” he said Tuesday. “I think it would discourage investment in oil, which ultimately means a higher oil price.”