Former US Treasury Secretary Larry Summers said on Tuesday the growing chorus of economists and politicians urging the Federal Reserve to halt aggressive rate hikes in order to fight inflation was wrong. Those critics say the Fed could push the economy into recession, but Summers argued there was a much bigger risk to the economy that the Fed might not do enough to bring prices down.
“I look at economic history and I see that there are many times when the Fed has not done enough and so inflation has reaccelerated, but I can’t find any time in the last 60 years when the Fed overdid it,” he added. Summers told CNN’s Wolf Blitzer on “The Situation Room.”
“Even if there is a slowdown or a recession, I don’t think there’s any reason to think the Fed has any real prospect of pushing inflation sustainably below [their stated inflation goal of] 2% without much more action,” he said.
Summers added that his best estimate is that interest rates may need to rise to 5.5% “if we are to have any meaningful prospect of bringing inflation back to the target level to which the Fed is committed.” The central bank’s benchmark policy rate is currently between 3% and 3.75%.
The US economy has been showing warning signs of an impending recession for months. A number of economic leaders, including JPMorgan Chase CEO Jamie Dimon and Amazon founder Jeff Bezos, have said they fear a recession is imminent.
The markets, meanwhile, have fallen sharply this year. Summers agrees that it’s far more likely than not there will be a recession in the next year, and encouraged Americans to recognize that “there may be tougher times ahead.” He suggested that those worried about preparing for recession should be careful not to max out their borrowing capacity and avoid taking financial risks.
On taxes on oil revenues: On Tuesday, Summers also pushed back after President Joe Biden raised the possibility of punishing the oil industry for high prices by imposing a windfall tax.
Biden on Monday called Big Oil’s jaw-dropping profits and raised the possibility of tax penalty lawsuits if oil and gas companies don’t invest more aggressively in new supplies to drive down prices.
“Today’s record profits are not because they are doing something new or innovative. Profits are a war bonanza,” 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 top adviser to Presidents Bill Clinton and Barack Obama, has been a vocal critic of Biden at times.
“I think the fear is that if we establish that every time the price of oil goes up significantly, we’re going to impose windfall taxes, the incentive to drill for oil would be diminished. It’s because you don’t you wouldn’t feel like you could reap the full reward from your oil when you really needed it,” he said Tuesday. “I think it would discourage investment in oil, which would ultimately mean higher oil prices.”
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