Larry Summers Says Inconsistency And Lack Of Coherence Of Fed's Reading Of Economic Situation 'Disturbing'

Former Treasury Secretary Larry Summers on Friday revisited the rate pause announced by the Federal Reserve this week and also shed some insight into the Chinese economy in light of the People's Bank of China's rate cut.

What Happened: The Fed action this week was a little bit confusing, Summers said in an interview with Bloomberg.

"I don’t really understand the internal consistency of an approach of pausing at this meeting but then signaling to further rate hikes down the road and signaling that they no longer expect unemployment to increase nearly as much as they used to expect it," he said.

The decision to pause felt like "it was driven as much by the internal political dynamics of the Fed as by any consistent and coherent reading of the economic situation and that was a bit disturbing," Summers said.

Summers also suggested that the economic conditions remain fairly robust. Consumer spending, which accounted for 70% of the economy, is running at a strong clip and the employment growth has outpaced population growth, he said.

Although data on wages has been mixed, the wage growth adjusted for changes in the composition of the labor force is showing substantial strength, he added.

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Summers said the idea of a durable reduction in inflation wasn't clearly established and that there wasn't clear evidence of an economic slowdown either.

"So in that context, I think the Fed has probably got to maintain a posture of moving towards restraint," he said.

China's Challenges: Summers also said China is facing a very difficult set of challenges from the real estate bubble.

He noted that the number of births in China has fallen by almost 50% in the last six years, despite the country eliminating the one-child policy. There has also been a flight of capital from the country, he added.

"Whether it’s a supply of people, or investment in new capital, I think you’ve got some fundamental bets that aren’t running that positive in China and that’s going to be a challenge along with the nearer term issues for the Chinese economy," Summers said.

The economist said this will likely exert downward pressure on global commodity prices.

Read Next: Larry Summers Found Fed’s Rate Hike Pause ‘A Little Bit Confusing’ — Feels Policy Meet Was Driven By ‘Internal Political Dynamics’

Photo: World Economic Forum via Wikimedia Commons