Tags: Summers | Fed | rates | inflation

Summers: Why the Fed Should Remain Patient on Raising Rates

By    |   Thursday, 12 February 2015 01:05 PM

Former Treasury Secretary Larry Summers recently said the Federal Reserve should refrain from raising interest rates until it "sees the whites of inflation's eyes."

And why does he feel that way?

"There's no reason to slow down the economy except to serve a purpose. Wages haven't been rising in way that has kept up with prices for a long time," the Harvard professor told CNBC.

Average hourly earnings advanced just 1.7 percent last year, while the personal consumption expenditures price index climbed 0.7 percent

"Middle-class families are still struggling, and the Fed is still well short of its [2 percent] inflation target," Summers said.

"Indeed, if you look at core inflation [excluding food and energy] and take out housing, there's no price increases at all. So, we've got room."

Summers doesn't rule out the possibility that the Fed might have to increase rates soon. But, "the criteria should be no hitting the brakes until we see a barrier that we're worried of crashing into, and with core non-housing inflation at zero, we're some distance from that," he argued.

"We are in an extraordinarily uncommon and unusual place — the aftermath of the financial crisis, structural increases in savings relative to investment, a deflationary world economy, the rest of the industrial world, China. And so, extraordinary conditions require extraordinary measures," Summers explained.

"So this is not the time for the traditional central bank playbook. This is the time for a recognition of what are some very real worries."

Economists' consensus is that the Fed will move around mid-year.

Star investor Bill Gross of Janus Capital Group expects the first increase to come in June or July, totaling 25 basis points.

"We will probably know by March for sure," he told the Financial Times. "In the March meeting, the Fed will either keep their patient language or they will drop it, and that will be the signal as to whether the rise will come in June or whether it is later."

In its last two policy statements the Fed has said it will be "patient" in lifting rates. Gross expects the central bank to boost rates twice this year.

It has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

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Former Treasury Secretary Larry Summers recently said the Federal Reserve should refrain from raising interest rates until it "sees the whites of inflation's eyes."
Summers, Fed, rates, inflation
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2015-05-12
Thursday, 12 February 2015 01:05 PM
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