Friday, February 19, 2021

Larry Summers Blasts Bloomberg Columnist Over Developing Price Inflation Comments

Larry Summers

In a series of tweets, former Treasury Secretary Larry Summers called out Noah Smith for a column he recently wrote.

It is only February but Summers says the column may be the most naive column written this year:

Summers has a very important point. This bewildering comment in Smith's bewildering column really takes the cake:

 The central bank should make it clear that if deficit spending leads to substantial inflation — say, over 6% — it will raise interest rates to fight it, even if that means hurting the economy.

Got that? Smith doesn't think the Fed should start a serious battle against inflation until it hits 6%! 

Is it really necessary to remind observers that Richard Nixon imposed price controls when price inflation as measured by the consumer price index was 4.08%.

 Inflation really starts to become a noticeable pain generally somewhere when it hits between 3% and 4% as measured by government price indexes.

It is possible that the Federal Reserve may start fighting price inflation when it climbs over 3% but a successful battle would require a hike in short-term rates at that time to around 5% rather rapidly and the Fed is not going to do that. The current Fed funds rate is targeted in the range of 0.0% to 0.25%.

So Summers may be correct that the Fed will start "battling" inflation long before it hits 6% but the Fed will try to blow the inflation out from 10 feet away and not use the bazooka that will be needed.

However, Summers warning about developing price inflation is sound. Smith's column will not age well.

Price inflation at 6% is a very real possibility and it will be very curious what Smith has to say at that time because price inflation at that rate is not going to look pretty at all.



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