The Fed's fight against inflation is far from over, and it's not yet time to claim a victory, former Treasury Secretary Larry Summers said this week.
What Happened: The Fed understands the future is uncertain, and it is determined to do what is necessary for a substantially uncertain environment, Summers suggested in an interview with Bloomberg Television on Friday.
“I think the consensus has become substantially too complacent about inflation for a variety of reasons,” he said. Even with the recent easing, inflation is still elevated compared to two years ago, he noted. Making a football analogy ahead of the Super Bowl, the former Treasury Secretary said we are getting closer to the red zone with respect to inflation, where it is tough to navigate.
“And so I think the gains in terms of further reduction are going to come harder,” Summers said.
He also noted that there are a variety of bounce-back factors, such as the wholesale used car prices, which are likely to become positive contributors to inflation. Financial conditions, in terms of tightness in financial markets, are probably back to the situation that prevailed late last summer, he added.
“So I think with that kind of picture, the prospect that we are not on our trajectory now where inflation is going to get to the target level and therefore this tightening cycle is not just about one more, two more, three more, 25 basis point increases, but something more fundamental,” Summers said.
“So, I don't think that's a moment for any kind of euphoria. And I think there is some complacency that is setting in, in many places.”
See also: Best Inflation Stocks
Why It’s Important: Following the steady easing in inflationary pressure since July 2022 and Fed Chair Jerome Powell’s reference to disinflation in his recent speeches, the financial markets have rallied. This is despite several Fed officials sticking to their hawkish scripts in their public appearances.
The stock market pulled back this week amid mixed earnings news flow, and the weakness intensified on Friday after the Bureau of Labor Statistics released revised data showing a 0.1% month-over-month increase in consumer prices for December, as opposed to the 0.1% drop reported initially. The BLS recalculates seasonal adjustment factors every year and adjusts data going back five years. The annual rate, which is not seasonally adjusted, was maintained unchanged.
The January CPI report to be released on Tuesday is expected to show a 0.4% month-over-month increase in the headline index and a 0.3% increase in core consumer prices. The annual headline and core readings may have increased by 6.2% and 5.4%, respectively, a deceleration from the 6.5% and 5.7% increases in December.
Photo by Brookings Institution on Flickr
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