Tags: larry summers | federal reserve | rate hike | risk

Harvard's Larry Summers: Rate Hike Now Isn't 'Prudent Risk to Take'

Harvard's Larry Summers: Rate Hike Now Isn't 'Prudent Risk to Take'
Larry Summers

By    |   Friday, 11 September 2015 09:15 AM

Former Treasury Secretary Larry Summers says hiking rates right now “doesn't seem like a prudent risk” that the Federal Reserve should take.

Data on the three topics the central bank cares about most (inflation, employment and financial stability) are all indicating the central bank should hold off on raising interest rates, he told CNBC.

Inflation is below target, the labor-force participation rate is lower than it's been in a quarter of a century, and financial-market volatility is elevated, CNBC reported.

"Today, when you've got real major uncertainties coming out of China, coming out of the other emerging markets; when it hasn't been such an easy period in Japan; when worldwide you look at major countries, real interest rates are zero and everywhere inflation is expected to be below 2 percent, it's very hard to see the case," he told CNBC.

"They can indicate a desire to be slow," he said. "When people see them move when inflation is well below target, when market volatility is high, I think people are going to be very uncertain as to what comes next.

The central bank has a "real problem" if it hikes and it turns out to be a mistake.

"Then they've got drama in financial markets that they didn't want. They've got the possibility of a deflationary psychology taking hold. They've got the need to reverse themselves on a dime, which isn't easy to do and would do much more damage to their credibility," he said.

Fed policy makers meet Sept. 16-17 to determine whether to raise rates for the first time in almost a decade. The central bank has held its short-term rate target at virtually zero since December 2008 to bolster the economy, Bloomberg News reported.

The Fed will raise its key rate next week, according to the median estimate of economists surveyed by Bloomberg, even as futures traders have pared the odds of an increase to 28 percent, from 38 percent at the end of last month. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

“It’s very much about the Fed this week but there’s also the backdrop of what’s happening with emerging markets,” said Anwiti Bahuguna, senior portfolio manager at Columbia Threadneedle Investments.

“It’s a very volatile time and markets are trying to gauge whether growth in China is worse than markets have priced in, and if the first rate hike in the U.S. will add to an emerging-market crisis and if that will affect U.S. growth again.”

David Stockman, White House budget director under President Reagan, disagrees with Summers, arguing it's well past time for the Fed to start boosting rates.

He notes that the unemployment rate registered 5.1 percent in August, the lowest in seven year years and in the lowest quintile over the last 45 years. The 5 percent level is considered full employment by many economists.

"We are effectively in the end zone, and these clowns are sitting there debating whether or not we can let the rate go above zero," Stockman told Bloomberg TV.

The Fed has kept its target for the federal funds rate at a record low of zero to 0.25 percent since December 2008. Central bank officials have indicated that they are likely to begin raising the rate this year.

"What we need is to get a central bank under control that allows Wall Street to discover prices based on supply and demand," Stockman says.

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Former Treasury Secretary Larry Summers says hiking rates right now "doesn't seem like a prudent risk" that the Federal Reserve should take.
larry summers, federal reserve, rate hike, risk
Friday, 11 September 2015 09:15 AM
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