Larry Summers Talks CPI, Fed Moves

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We're joined right now by Larry Summers Harvard, a very special contributor here on Wall Street Week. So Larry, great to have you with us on short notice. We've been talking about inflation on Wall Street Week for some time now. I know you're not hoping for more inflation, but you've been warning about it. What do you make of the numbers we saw today?

I was not hugely surprised by the numbers. In an economy that's growing faster than potential, with an unemployment rate that has a three handle, in the presence of massive and growing budget deficits and epically easy financial conditions, the idea that inflation would remain robust or even accelerate should not be a surprise to anyone, and that's what this

Larry, you mentioned the supercore that, as I recalled, shared J. Powellmong others has talked about. Specifically, it raises the issue of are there aberrations you've seen in these data? We hear some people saying, wait a second, this is really housing and auto insurance. There are a couple of outliers, and that the rest isn't as trouble saying is that right?

I don't think so.

Look, you can always find particular indicators that are up or down, but when you're making up a story month after month, that's a problem. When commodity prices are spiking and those are being taken as a market indicator of inflation expectations, when break evens have risen, when the political economy of the country is heavily about inflation, trying to dismiss it on an indicator by indicator.

Basis is an odd thing to do.

Look, it is a technical subject, the priced indicaes for housing. I don't think there are many Americans who feel like housing is becoming lots more.

Affordable these days. They really don't.

And so to argue that somehow housing isn't a source of inflation psychology seems to me to be quite a surprising.

View to take.

Look, why is there Why are we thinking about rate cuts when the economy is below oh, what the FED.

Thinks is the normal unemployment rate.

When the economy is growing faster than what the FED thinks is potential, and when inflation is unambiguously above target and plausibly accelerating.

The FED has.

Once again, in important respects, lost its way over the last six or nine months, in the same way, making policy and making forecasts based on hope rather than on a hard headed look at reality. I think that the FED did a good job of cleaning up on the errors they had made in twenty twenty one, and I think it's reasonable to think that they will pivot off the error they made last fall that led markets to be ludicrously expecting six cuts this year, and I'm hopeful that that will happen.

But I think the FED.

Does need to learn some important lessons from this experience. Let me say one other thing if I could, David, there's been a lot of talk about nineteen ninety five as some kind of useful analogy.

I think not.

The unemployment rate was five point six percent in nineteen ninety five. Equity markets, as shown by what shown by the fact that they more than doubled subsequently, were not.

Frothy. Particularly in nineteen.

Ninety five, we had just come off a major program of deficit reduction rather than being in a program of unprecedented fiscal expansion, and we had really clear evidence of a kind we don't yet have now of productivity acceleration, and.

Interest rates were higher than they are right now.

So the case that somehow this moment looks like nineteen ninety five and that's a reason for cutting is something that I find inexplicable.

Another thing that seems to me is.

Problematic is the notions that are increasingly being brooded about that the FED is going to slow QT. Of course, one of the things that today's movement and interest rates, the interstrates that interst rates moves that we've seen over the last month mean is that the fed's efforts to do parry trades in the bond market have proven to be extremely expensive for taxpayers.

And the length of time for which.

The FED is going to be showing annual losses or on a mark to market basis large balance sheet losses. That looks like it's longer than we thought some months ago. So we need a FED that stays focused on what is very clearly the focus of the American people, which is price stability. And I'm afraid there are some signs that in the last few months they have lost their focus in favor of more ambitious economic theories about preempting.

Slack that's not happening.

Were some such lar You're always the first to warness that things can change, so we can't predict what's going to happen in the fall and into next year. You've said you think it's definitely a mistake for the FED to cut in June. But given where we are now, what you know right now, if you had to make a decision, are we going to see any cuts this year? And what is the likelihood of actually an increase?

Just to quibble with what you said, I said, on current facts, I see no case.

For a cut in June. But facts can change.

Inflation indicators could come in much lower than most of us are expecting.

The economy could turn down.

So never make an absolute judgment about policy several months from now, because all kinds of surprises.

Could happen.

I think the odds are that the next rate cut will be down rather than up. But I think you have to assign a greater probability to the next rate cut rate move being up than you did.

Several months ago.

I don't know whether it's fifteen percent or it's twenty five percent, but somewhere in that range is what I would say for the next rate cut rate being up. I still think the odds probably favor another rate cut this year, but not by very much, and not by as much as is priced into the markets. Even after the adjustment that we have seen. So reality markets are adjusting to reality. The FED is adjusting to reality, but I think the process is slower than would be ideal.

Laurie, let me ask you what for someone'st be the scary question, which is does the FED have the power to get their arms around inflation at this point through monetary policy or are there other factors that are larger than what they can really effect over the shorter medium term.

I big FED.

Has considerable influence over inflation expectations, which are an important determinant of subsequent inflation. I think monetary restraint does influence the economy, which feeds through into the inflation process. But gosh, we ought to be doing everything we can on the supply side.

Anytime anybody sees.

A bottleneck, we ought to be going after it.

I am all for.

Effective competition policy that restrain means price increases. I think the most important competition policy is maintaining economic openness and allowing competition for US goods from less expensive foreign goods. That's the most important competition policy. That's the most important. Anti gouging policy, that's the most important. Contain excessive profit margins policy. And so I'm sorry to see the extent of bipartisan consensus in favor of policies that are relatively protectionist.

So yes, we should complement the FED with.

Fiscal policies that are oriented towards restoring credibility, recognizing the defense spending that's going to need to come and allowing for it, and with microeconomic policies that are competition promoting, the most important of which is openness to the global economy with respect to goods, with respect to to labor, with respect.

With respect to the flow of capital.

So, Larry, you mentioned nineteen ninety five in productivity. Is there some hope perhaps that we can get some relief from inflation because of a general of AI. You're on the board of Open AI. We had Jamie Dimond this week come up with his letter saying it's like the steam engine you at one point, I think that was like fire. Is there a prospect that we could get some downside risk, as it were to inflation from general of AI.

Andy, it's a question about horizon shaved.

And again I never make completely confident predictions because the one thing we know about.

The economy is that it surprises us.

I think that's potentially a very important factor if you look three or four years out. I would be very surprised if it was an important factor in.

The next year or two.

And I think the fact that open AI or not open AI artificial intelligence is a potential competitor for commentators leads this to kind of have more saliency commentary.

Than it otherwise would.

So yes, for the long run, I think this could be a huge event for inflation, a huge event for productivity growth. But I'd be pretty surprised if the effects were really large in the short run.

And I thank you for mentioning commentators and not interviewers in that sense. I really appreciate that one last question is important to Bloomberg audiences in particular financial conditions. You referred to the signaling of cut's last fall. Financial conditions have been sort of off to the races here. To what extent do you think financial conditions played a significant role in these numbers we got today?

Well, I think there's no question that.

The twelve trillion dollars of wealth that have been created have contributed to greater spending, which has contributed to inflationary pressure. I think the availability of credit has had similar kinds of effects, So I don't I think it's hard to quantify precisely, but I think there's no question.

That financial conditions have had a role.

But look, David, sometimes the indicators or different indicators are pointing in different directions. This time, activity is super fast, Unemployment is very low, fiscal is highly expansionary, financial conditions are very loose.

On the ground.

Inflation measures are above target and possibly accelerating. What is the theory of our rate cut into that that configuration right now? I don't think there is one, and I think that the FED has a communication challenge in keeping it on the table, because again, anything can happen. It can be financial accidents, there can be sudden changes towards reduced employment. There can be global developments, so never rule anything out, but I think there is a communication challenge around the fact.

That in the mainstream scenario, we do not need rate cuts right now.