We start with Chairman Powell's remarks in Jackson Hole and welcome back our very special contributor Larry Summers of Harvard. So, Larry, we heard this week from share Powell. What did you make of what he had to say?
Look, I think he's in the right broad place.
Inflation is coming down, the economy is slowing.
On current facts.
Absolutely, the next move should be towards monetary policy easing. And that's what he said, and I'm glad he said that. I think there were a number of really important issues that are likely to be shaping of the policies for the FED and for the economy more broadly that he didn't address. He didn't say anything about epic budget deficit
challenges in the years ahead. At the same time, we've got a huge investment demand for the green economy and a huge investment demand for data centers and the like. And so the question of what the neutral interest rate is was one he talked pat He didn't really engage with the FED is saying that the neutral interest rate is somewhere in the twos.
I think that's extremely unlikely.
And if you don't have the right north star, you don't navigate very accurately, and so I think the FEDS making a serious mistake by believing that the neutral interest strate is so low, and therefore is misjudging how restrictive
any given level of policy is. So I'd be surprised, quite surprised if it actually proves possible with sustainable ability to bring inflation down by nearly as much as the market is expecting, or bring interest rates down by nearly as much as the market is expecting over the next two years.
The other thing that the FED must.
Be aware of, and I understand why the Chair didn't address it, but it seems to me it's something they have to be keeping in mind. Is we've got what people regard as a fifty to fifty presidential election coming, and one of the candidates says that the FED shouldn't be independent anymore. That same candidate, Donald Trump, says that we need a much weaker dollar. That same candidate says we need to push tariffs way up, meaning higher prices of consumer goods and more of an inflation a threat.
That same candidate talks about sending millions of workers home, which would create epically tight labor markets in our country and would surely go back to labor shortages and wage inflation.
Larry turning back for a minute to Jay Powell's remarks this week, he had sort of an initial explanation of what happened with inflation, where it came from what the FED did in response, and at least my take on it was we had really supply shocks that were really unprecedented. It took a longer sort of out, and we had this big demand push, particularly in goods, that spilled over into services. So it was sort of understandable why we sort of made a mistake on team transitory.
What's your reaction, Look, I guess it's under I guess it's understandable. I think I was reasonably clear in the spring of twenty and twenty one that it seemed to me that.
There were enormous inflation risks.
I think, looking back, it's kind of incredible that the Fed could have said in May of twenty twenty one that it expected to hold interest rates at zero until the summer of twenty twenty four, and so the misjudgment was a pretty egregious one. They're trying to leave the impression that it was all surprising supply shocks, and I think there are two problems with that view. One is
there shouldn't have been anything very surprising about it. It's not like everybody didn't know that COVID was affecting the supply capacity of the economy. So when the supply capacities down, that means you have to adjust the demand.
And the other.
Is that if you look at nominal GDP growth, so that's.
Dollar GEDP, it's the money.
Stock adjusted for the velocity, it averaged ten percent in twenty twenty one, in twenty twenty two, and above eight percent for the three years twenty twenty one to twenty twenty three. So how can you think with eight to ten percent nominal GDP growth that you're going to have anything like target inflation? And that nominal GDP is just a measure of demand, which is what monetary policy is
supposed to be all about. So I think the FED got it wrong, and in all honesty, I don't think it was I goes a low point in terms of monetary policy judgment. But you know, we all make lots of mistakes, and the important thing is when you make a mistake, to recognize it and fix it. And I've got to give the FED credit for the fact that while it wasn't always obvious that this would be the case, they moved strongly enough and vigorously enough to keep expectations anchored.
And that's why it now looks more.
Frankly than I would have expected, like we're going to get out of this very costly inflation episode without a major recession.
Larry, you mentioned the possibility of Donald Trump being elected in November. There is another candidate. You also said, it's at this point it looks like a virtual toss up between Donald Trump and Kamala Harris. We now are beginning to get some indications from Kamala Harris about what she might do for and to the economy. What do you make of her positions you've heard so far.
I have been in.
Active in these policy debates on the Democratic side for a long time, and I've always tended to be part of the group that favors policies that are more growth oriented, that worry more about financial responsibility, that stress letting markets operate strongly and vigorously. I've liked universalist themes rather than themes that pit business against labor, or one class or one identity group against another, And so I was very encouraged by.
The speech last night.
There was one word that came through so strongly when the Vice President talked about the economy, and that was opportunity.
And I think that's.
Exactly the right word, because it's a word that embraces everybody.
It's a word that embraces the need to.
Make sure that poor children get the help they need from head start. It's a word that embraces making sure that families have the resources they need to support their newborn and then their children as they go on. It's a word that embraces the need for affordability of higher education. It's a word that embraces and I think this is critical and I hope that Vice President Harris will talk much more about this, not just celebrating public education, but
recognizing that public actions case needs to be made much better. Because, you know, David, in an earlier and much more elitist age, the Duke of Wellington said in Britain in the nineteenth century that the Battle of Waterloo had been won on the playing fields of Eton. I'm here to tell you that the battle for America's future will be won or
lost in our nation's public schools. And I heard all that when I heard the Vice President talking about opportunity, and I hope that those themes, rather than some of the themes that I think are harder to justify, about gouging and the like, even if they do have their political appeal, I hope those will be a larger fraction of the campaign going forward, and much much more important.
I hope that, if, as I expect, Vice President Harris is elected a president, that the broad economic strategy is going to be one that's all about opportunity.
Well, Larry, thank you so much. It's always a treat to have you with us that as our special contributor here on Wall Street Week. He's Larry Summers of Harvard