Former US Treasury Secretary Larry Summers said on Tuesday that the growing chorus of economists and politicians urging the Federal Reserve to pause its aggressive rate hikes in order to fight inflation are misguided. Those critics say that the Fed could throw the economy into recession, but Summers argued there’s a much greater risk to the economy that the Fed is not doing enough to bring down prices.
“I look at economic history and I see that there are many times when the Fed didn’t do enough and so inflation re-accelerated, but I can’t find any times 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 recession, I don’t think there’s any reason to think that the Fed has any real prospect of pushing inflation durably below [their stated inflation goal of] 2% without a lot more action,” he said.
Summers added that his best guess is interest rates may have to increase to 5.5% “if we’re going to have a significant prospect of restoring inflation to the target level that the Fed has said it’s committed to.” The central bank’s benchmark lending rate currently sits at between 3% and 3.75%.
The US economy has been flashing warning signs of an upcoming recession for months. A number of economic leaders — including JPMorgan Chase CEO Jamie Dimon and Amazon founder Jeff Bezos — have said they worry that a recession is imminent.
Markets, meanwhile, have fallen significantly this year. Summers agrees that it’s substantially more likely than not there will be a recession within the next year, and encouraged Americans to recognize that “there may be some more difficult times ahead.” He suggested that those who are concerned about preparing for recession should make sure not to maximize their borrowing capacity and to avoid financial risk-taking.
On oil windfall 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 profit tax.
Biden on Monday called out Big Oil’s jaw-dropping profits and raised the possibility of pursuing tax penalties if oil and gas companies don’t invest more aggressively in new supply to lower prices.
“Record profits today are not because they’re doing something new or innovative. The profits are a windfall of war,” Biden said from the Roosevelt Room, alongside Treasury Secretary Janet Yellen and Energy Secretary Jennifer Granholm. “Enough is enough.”
Summers, an eminent Democratic economist and top adviser to Presidents Bill Clinton and Barack Obama, has at times been a vocal Biden critic.
“I think the fear is that if we establish that whenever the price of oil went up substantially we were going to impose windfall profits taxes, the incentive to drill for oil would be diminished. That’s because you wouldn’t feel like you could reap the full reward of your oil when it was really needed,” he said on Tuesday. “I think it would discourage investment in oil which ultimately mean higher oil prices.”