The Federal Reserve is causing “confusion” among investors by avoiding a clear declaration that unemployment is likely to rise during its fight against inflation, according to ex-Treasury Secretary Larry Summers.
Summers, a frequent critic of the Fed’s handling of inflation, detailed his concerns as Fed Chair Jerome Powell prepares to deliver pivotal remarks later this week at an economic conference in Jackson Hole, Wyo.
“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,” Summers said during an appearance on Bloomberg’s “Wall Street Week” in remarks published Monday.
Powell will address the Fed’s current view of the economy as investors seek clarity on the central bank’s next move. The market is currently pricing in a 54.5% probability of a three-quarter-percentage-point hike at the Fed’s next meeting in September as officials aim to tame inflation while still avoiding a lengthy economic slowdown.
Summers asserted that Powell needs to be honest about the fact that tightened economic policy will most likely result in job losses. The lack of a clear message would leave the market “very much in doubt about what lies ahead” and could further harm the Fed’s credibility, he added.
“The reality is that it’s probably not so realistic to think” the Fed can “get inflation all the way down without unemployment up — and they don’t want to acknowledge that,” Summers said. “That forces a certain confusion into all of their statements.”
The national unemployment rate was just 3.5% through July, according to the most recent jobs report. At present, the Fed projects unemployment will reach just 4.1% by 2024, even as it implements a series of sharp rate hikes that will weigh on the budgets of US firms.
Meanwhile, Summers, who served as an economic adviser to President Barack Obama, has argued that unemployment will have to rise to at least 5% to successfully tackle inflation — and potentially much higher.
He pointed out that US markets have rallied in recent weeks — a sign that investors do not yet see the Fed’s effort to cool the economy through rate hikes as restrictive.
“My hope is that we will get clarity that policy is not yet restrictive, that it needs to be restrictive if we’re going to contain inflation, and that we’ll need to accept the consequences of that,” Summers added.
Powell is widely expected to reiterate the Fed’s commitment to bringing down inflation during his remarks in Wyoming, which are set to occur on Friday.