Larry Summers Says Fed Should Stay On Its Course: Pausing Tightening 'Badly Misguided Advice'

Former Treasury Secretary Lawrence H. Summers has said the growing calls from politicians and economists for the U.S. Federal Reserve to pause its aggressive policy over fears of recession is “badly misguided” advice.

What Happened: “As the Fed prepares to meet, there is a growing chorus — both among political figures and economists — that the Fed should pause very soon for fear they will throw the economy into recession, given the lagged response of monetary policy. I believe this advice is badly misguided,” Summers tweeted.

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The Federal Reserve is set to announce its monetary policy outlook on Wednesday. Although market participants have factored in a 75 basis points hike, the consensus is that the central bank will slow down its aggressive policy in the future. 

Major Wall Street indices closed in the red on Tuesday. The SPDR S&P 500 ETF Trust SPY closed 0.44% lower while the Invesco NASDAQ 100 ETF QQQM shed 1.03%. The Vanguard Total Bond Market Index Fund ETF BND closed 0.1% higher.

Summers, who earlier said the U.S. was facing complex problems, argued that it is usually wiser to worry about things that have happened before, rather than those which have never occurred. 

"The Fed paused too soon because of recession fears many times between 1966 & 1981 ... Are there any cases where it kept fighting too long causing an excessive recession?" he tweeted.

Maintain Current Course: The former Treasury Secretary pointed out that the only previous time there was a dedicated monetary policy dominantly to avoid recession was the “disastrous 1966-1981 period.” 

“History suggests that once generated, high inflation is very hard to stop. The vast majority of efforts to stop inflation have failed in industrial countries,” Summers said.

"It is important to recall that expectations have remained anchored because the central bank has been moving. If the Fed stops moving, expectations may increase."

Summers warned that if the Fed does not carry through the current expectation of rates approaching 5%, "markets and others will see it as an easing."

 "On balance, especially given its past errors, the @federalreserve should stay on the current course and then evaluate things,” Summers tweeted.

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Photo by Brookings Institution on Flickr