(Bloomberg) — Former Treasury Secretary Lawrence Summers said the Federal Reserve should not let excessive concern about the credit crunch in the wake of the recent banking turmoil ease its drive to contain inflation.
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“It would be very unfortunate, for the banking system, if the Fed had to slow the rate of interest rate hikes appropriately given the credit crunch,” Summers said on Bloomberg Television’s “Wall Street Week.” David Westin.
According to Summers, Fed policymakers who meet to set rates on March 21-22 will need to recognize that slow credit creation will be a result of the turmoil triggered by the collapse of two banks last weekend. But “the slowing of credit is not nearly as much” as the amount of Fed tightening now removed from market pricing, he said.
“I think the Fed should not allow financial dominance,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. Financial dominance is a situation where a central bank does not dare to tighten its policy stance as this would threaten the stability of the financial system.
“It is reasonable – at least on the current facts, and they are changing very quickly these days, but on the current facts – to increase rates by 25 basis points”, Summers said.
scaring the public
Summers said that reacting too much to the banking situation by changing interest-rate policy may lead many observers to “feel that if the Fed was scared, they should be scared too”. Even easing in the fight to contain the rise in cost of living could lift inflation expectations, he said.
“So ironically it could raise inflationary expectations and cause the economy to contract,” he said. “I expect the Fed to hike 25 basis points.”
Summers reiterated his praise for the 50 basis-point rate hike by the European Central Bank on Thursday, and expressed hope that the example of ECB President Christine Lagarde would be a “role model” for the Fed.
Summers said, “She made it very clear that, with two different problems – inflation and financial stability – you can use two different tools to respond to the problems, not giving up on the inflationary dimension.” Can.”
The Fed moved on Sunday to address financial-stability concerns by setting up a new facility to help banks obtain long-term funds in exchange for assets, including Treasuries. Its objective is to stop the outflow of deposits from small banks.
“We can use directed policy to stand behind depositors separately from monetary policy,” Summers said.
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