Tags: Financial Markets | Larry Summers | Federal Reserve | Dangerous | Rate Hike

Harvard's Larry Summers: Fed Must Avoid Making 'Dangerous' Mistake

Harvard's Larry Summers: Fed Must Avoid Making 'Dangerous' Mistake

By    |   Sunday, 23 August 2015 08:06 PM

Former Treasury Secretary Larry Summers warns that the Federal Reserve shouldn’t hike rates right now because such a “dangerous” move this year will threaten all of the central bank’s major objectives.

“There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks and businesses to borrow money and engage in financial engineering,” the Harvard professor wrote in the Financial Times.

“At the time, I believed that the economic costs of a rate increase exceeded the financial stability benefits, but there were grounds for concern. That debate is now moot,” he wrote.

"Conditions could change, and the Fed has been careful to avoid outright commitments. But a reasonable assessment of current conditions suggest that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives — price stability, full employment and financial stability," he wrote.

The Fed has kept short-term interest rates at a record low near zero since December 2008.

So what's wrong with lifting rates now?

“With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence," he wrote.

"The Fed does not have to do the job. At this moment of fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results,” he wrote.

“Why, then, do so many believe that a rate increase is necessary? I doubt that, if rates were now 4 percent, there would be much pressure to raise them," he wrote.

Summers joins a growing chorus of economic experts who are urging the Fed to reconsider a rate hike right now.

CNBC commentator Ron Insana recommends that the Federal Reserve delay a rate hike while the global economy settles down.

“I think the Fed has to hold off on raising rates,” he wrote in a blog on CNBC.com. “The U.S. becomes the ultimate beneficiary of the world's travails, as it becomes increasingly energy self-sufficient, regains its cost-competitive advantage in manufacturing, continues to innovate and builds on its demographic strengths,” he said.

The nation’s central bank would do well to listen to Insana, who late last month predicted “a meaningful correction of 10 to 15 percent” for U.S. stocks.

“My biggest worry is not about the U.S. markets, nor its economy. I worry about an implosion in China, and the attendant contagion risk it represents,” he said.

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Former Treasury Secretary Larry Summers warns that the Federal Reserve shouldn't hike rates right now because such a "dangerous" move this year will threaten all of the central bank's major objectives.
Larry Summers, Federal Reserve, Dangerous, Rate Hike
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2015-06-23
Sunday, 23 August 2015 08:06 PM
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