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Larry Summers Was Right. Most Can’t Accept It
In March of 2021, when the Biden administration was on the verge of sending Americans $1,400 stimulus checks (to bridging the gap between the $2,000 direct payments Donald Trump insisted on before he left office and the $600 checks Republicans cleared before Congress flipped to Democrats), Janet Yellen made a cameo on ABC's "This Week."
At the time, Larry Summers was just beginning to warn about the risk of materially higher inflation outcomes in the US. Yellen wasn't convinced.
"If we get bac
In all fairness to you and everyone else….
Putin Hooten and shootin
Yes, … and the seeming war on immigrants who would love to come and fill some of the job openings…
Yeah Larry was mostly lucky. I don’t accept Summers being “right”. He was fortunate. Anyway, even if Powell tightened sooner inflation would still be almost as high as it is. Look around the world. New Zeeland and Canada tightened more quickly and implemented less fiscal stimulus up front. By Summers logic, that should have resulted in much lower inflation in those countries. Take a look at those countries- they both have high inflation similar to the US.
I’m beginning to wonder if the inverted yield curve is more about the bond market getting the long term inflation rate wrong than the FED overdoing it on the short end. A long time ago, the bond market got the end of inflation wrong. Clearly 15% for 30 years wasn’t a good idea in the early eighties. As with the stock market, the turns are very hard to predict.
That’s absolutely possible. In fact, I’d say that as things currently stand, that’s the most accurate assessment.
Ironic to me that while many comment on OVERLL monetary conditions not being restrictive, while the fact that Fed controlled monetary policy is still stimulative by any historic measure.
Get on your Bloomberg termina, use FRED Data, or pull the numbers in from Macrotrends …. use any possible combination of measures of inflation data (PCE, YOY CPI, PPI,) and any proxy for monetary policy (Target Fed Funds Rate, 2 Year notes, 1 Year T-bills) and Monetary policy is the eunuch that showed up at a gun fight with a spoon.
For example, Target Fed Funds Rate (FDTR) is still 1.6% LESS THAN YoY CPI, versus a mean of 90 basis points GREATER THAN than using data going back to 1970 (which should encompass almost any economic environment you might hope for).
So, the Fed has not become restrictive, is NOT rolling off its balance sheet, and overall monetary conditions are easy, …. so what sort of success in reducing the rate of inflation would you possibly expect?
FWIW (which let’s be honest is nothing), this is roughly my take as well. Interest rates currently aren’t high enough to sop up all the excess money in the system via the pandemic checks, PPP, QE, etc.
It’s usually not the general direction policymakers get wrong after an economic shock, but the magnitude.
Things change. Shouldn’t policy choices be flexible?
Rate hikes are damaging Main Street with little to show for it. Again, how do higher rates reduce food or healthcare inflation? Crushing housing does what to lower rents?
But people in the markets, ivory towers and readers here are mostly insulated from such concerns. It’s just an annoyance for us anointed ones. Not for 80% of the population.
What if the data used by the Fed is inaccurate?
https://markets.businessinsider.com/news/stocks/economy-survey-response-rate-inflation-federal-reserve-policy-interest-rates-2022-12
All class. It takes a very confident person, which you clearly are, to post up such an admission of a bad call. It’s yet another reason why your Report is worth the price of admission. You put out your best assessment and the admit when a course correction is needed. Rare.
I can’t remember when (Nov/Dec 21 or Jan 22), but it was a 180 turn from “transitory” to inflation is becoming embedded, a problem, etc. The tenor of those articles changed immediately.
I turned aggressively hawkish on inflation/Fed policy during the first week of February 2022.
agreed
It takes a big man to admit he was wrong and for you to do it so humbly is a breath of fresh air. You do admit on a regular basis that economics is a soft science. I am not a trained economist but as the last inflation numbers prove, inflation is still bad and not getting better, You are also correct that we most likely will not achieve hyperinflation. Because of policy lag they will overshoot causing a recession. I don’t think it is possible to tame inflation while we are fighting Russia.
A 2% target inflation rate given current macro and micro circumstances is completely unrealistic imho…
Right and wrong…Most people are luckuy if they are right more than 50% of the time. In the interest of humility, I ask myself When I am right, particularly when I am very right, what percentage was I right for the wrong reason. Here’s what I learned, Next time we have a systemic crisis, let’s give all the money to bottom 80%, and don’t bail out the finance industry and the huge companies like airlines that spent 85% of their free cash flow on stock buybacks. They should have bought a 25 % shar eof the airlines instead of giving them money….We’re going to have inflation for a long time, but the bottom 80% didn’t get a raise for 40 years.