Tags: Summers | Fed | rates | economy

Summers: Fed Has 'Reason for Prudence and Caution' in Raising Rates

By    |   Thursday, 18 December 2014 02:08 PM

Former Treasury Secretary Larry Summers appears to agree with the Federal Reserve's policy statement Wednesday, which stated that the Fed will be "patient" in raising interest rates.

"We have an economy that appears to be gathering strength," Summers, now a Harvard professor, told CNBC. "But on the other hand, inflation expectations appear to be dissipating. So it's a paradox."

The economy grew 3.9 percent annualized in the third quarter, but the personal consumption expenditures price index rose only 1.4 percent in the 12 months through October, far below the Fed's 2 percent target.

So the central bank is correct in adopting a watch-and-wait strategy, Summers said. "They need to maintain an awareness of the fact that if they were to make a mistake and allow deflation to set in or the economy were going to weaken again, we don't have room for a traditional monetary ease," he explained.

"That's a reason for prudence and caution with respect to tightening monetary conditions. But at the same time the Fed has to do its fundamental job of preserving price stability. And so it's a balancing act. And they're going to have to watch as they move forward."

Summers remains cautious that secular stagnation could rear its ugly head.

"Certainly right now the economy does look strong. But secular stagnation is a broad economic concept with applicability to the global economy," he noted.

"There's very real risk of weakness in the industrialized world. And with respect to the United States, yes, it does look like we're pulling out of the liquidity trap. But think about this — on average, more than every five years the Fed has had to cut rates by 300 basis points to get the economy back up on its feet. It sure looks like it's going to be quite a while before we have that much room."

Stocks have soared since the Fed issued its statement Wednesday afternoon.

"The Fed is in the fortunate position of enabling the economy to gather steam without the shadow of immediately rising rates," Paul Atkinson, head of North American equities at Aberdeen Asset Management, told The New York Times. "In our opinion, that has to be positive for equity investors."

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Former Treasury Secretary Larry Summers appears to agree with the Federal Reserve's policy statement Wednesday, which stated that the Fed will be "patient" in raising interest rates.
Summers, Fed, rates, economy
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2014-08-18
Thursday, 18 December 2014 02:08 PM
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