Lawrence Summers, the former US treasury secretary, says that the jobless rate in the US needs to rise above 5% for five years so that inflation can be curbed and which at present is running at the highest pace in four decades.
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According to Bloomberg News, Summers, in a speech in London on Monday, said that the US needs two years of 7.5% unemployment rate or 5 years of 6% unemployment or 10% unemployment for one year, keeping an average of 5% for five years to contain inflation.
Federal Reserve policymakers on Wednesday had raised interest rates by 75 basis points, the most significant hike since 1994. In their outlook, the Federal Reserve has signaled they were seeing inflating easing from the current 6% to below 3% next year and to 2.5 % by 2024. The median forecast showed that unemployment will rise to 4.1 % by 2024, up from 3.6 % last month.
Summers, now a Harvard University Professor and a paid contributor to Bloomberg Television, said that the gap between 7.5% unemployment and 4.1 % for a single year is immense. He asked if the central bank was prepared to stabilize the inflation rate as he had proposed.
On Friday, the Federal Reserve said they would take necessary steps to bring prices under control, reiterating that price stability was required to support a strong labor market. It said that its commitment to reigning in inflation was unconditional.
Summers repeated his earlier calls that Federal Reserve’s task was to temper price hikes similar to what former Fed Chair Paul Volcker had done 40 years ago to ensure deep recession and unemployment running into double digits to get inflation under control. He said the US needs a strict monetary policy like those in the late 1970s and early 1980s.
Summers said that the Central bank should avoid communicating its future monetary policy to the public. According to him, forward guidance should be abandoned to return to humility and take difficult decisions rather than being slack and accepting the sustained inflation that remains above target. Summer fears that the US will have both secular stagflation and secular stagnation.
