By Daily Mail (U.S.) | Created at 2024-11-14 02:30:38 | Updated at 2024-11-22 05:02:50
1 week ago
Liberal economist Larry Summers warned that inflation is still not fixed and that a Trump administration could make things even worse.
Summers, who was Treasury Secretary under Bill Clinton and also advised Barack Obama after 2008 financial crisis, was correct in his 2021 prediction that not getting 'Bidenflation' under control would bring back Donald Trump.
In a talk at the New York Economic Club, Summers says the Jerome Powell-led Federal reserve is still not taking it seriously enough.
'My own judgement is that the Fed and markets ae still underestimating the overheating risk,' Summers said.
He then predicted a potential disaster for a decision Powell has already made: 'I ask myself: Why is cutting rates a priority into that environment?'
Liberal economist Larry Summers warned that inflation is still not fixed and that a Trump administration could make things even worse
Summers is worried that President-elect Donald Trump may only make 'Bidenflation' worse
The central bank made a 25 basis point cut Thursday, bringing rates down between 4.5 percent and 4.75 percent.
Summers called this both an 'astonishing' and 'huge' mistake, similar to when the Fed was late to raise rates three years ago.
'I am fearful that the Fed is going to be more like once burned, twice burned, rather than once burned, twice shy, on inflationary risks,' he said.
Lower rates are good news for consumers as it makes borrowing money less expensive, and should mean cheaper loans and credit card rates eventually trickle down to Americans.
It is the second consecutive time the Fed, led by Powell, has cut rates this year, following an aggressive rate-hiking campaign to curb inflation.
However, Summers remains unconvinced: 'The job's not done on inflation,' Powell said.
He added that he's worried that Trump, by using tariffs, could take a Biden problem and make it even worse.
'There is a very substantial risk that the president will attempt to implement what he talked about. If he does, the consequences are likely to be substantially greater inflation than what was set off by the excessive Biden stimulus,' Summers said.
He then predicted a potential disaster for a decision Jerome Powell has already made : 'I ask myself: Why is cutting rates a priority into that environment?'
The central bank made a 25 basis point cut Thursday, bringing rates down between 4.5 percent and 4.75 percent
Trump is expected to allow Powell to stay in his job until the end of his term in May, 2026, according to CNN.
He says there could be a 'substantial adverse supply shock from higher prices' and a 'substantial risk of a labor shortage, which in turn is an inflationary force' by Trump's plan to deport illegal migrants.
While Trump could still change his mind, the current thinking among him and his economic team is that Powell will remain at the helm of the central bank as it works to slash interest rates.
Powell, a Republican with a background in private equity, was originally appointed to lead the Fed by Trump in 2018. President Joe Biden later reappointed him for a second term.
Trump has also taken issue with the Fed's lack of transparency, criticizing its private policy meetings and the delayed release of discussion notes.
According to CNN, Trump's aides have suggested that he'd prefer real-time publication of Fed minutes and economic reports, with meetings held on-camera for greater public insight.
During Trump's first term, he and Powell clashed repeatedly. In 2018, Trump openly considered replacing Powell after a rate hike by the central bank, though the president legally cannot remove a Fed chair unless they break the law.
Thursday's decision is the second time the Fed has cut rates this year, amid a slowing labor market and cooling inflation.
During a press conference Thursday, Powell said it was 'not permitted under the law' for a president to fire or demote a Fed Chair
Policymakers voted to cut interest rates by a bumper 50 basis points in September, bringing benchmark borrowing costs down from 23-year highs.
Experts note that while the decision to keep Powell as Fed Chair is significant, it may be overshadowed by the potential economic changes a second Trump administration could bring.
Trump's recent election victory and the likelihood of a Republican-controlled Congress by January signal possible policy shifts - from import tariffs to tax cuts and restricted immigration - that could reshape the economic landscape Fed policymakers anticipated for next year.
While these changes could take months to navigate through Congress, even with Republican majorities, they hold the potential to alter the country's outlook on growth and inflation significantly.
Economists from across the political spectrum have warned Trump's policies could reignite inflation - and therefore slow or stop the Fed's moves to cut interest rates.
Jonathan Moyes, Head of Investment Research at Wealth Club, said: 'All eyes will be on Donald Trump and any major changes to tax and spending plans once the new administration has been formed.
'Go too far too soon with any tax cuts, and the Fed may be forced to hike rates to cool any additional inflationary pressures, potentially setting the stage for a conflict between the new administration and the Fed in 2025.
'For now, as ever, the outlook remains uncertain.'
