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Fed Shouldn't Raise Interest Rates, Ex-Treasury Secretary Summers Cautions

Aug 25, 2015
Originally published on August 25, 2015 2:53 pm
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I'm Steve Inskeep on an unsettled and unsettling morning for world stock markets. It is on this morning that we're going to hear a warning to the Federal Reserve. The Fed has signaled it wants to raise short-term interest rates soon. That's a big deal, since rates have been held near zero for years, driving the recovery from the great recession. The Fed has been looking for the right moment to raise interest rates and avoid overheating the economy. Lawrence Summers contends that this is absolutely the wrong moment. The former treasury secretary and adviser to President Obama is campaigning for the Fed to hold off, and he's on the line.

Secretary Summers, good to talk with you again.

LAWRENCE SUMMERS: Good to be with you.

INSKEEP: Now, people may hear you saying this and assume that you're just reacting to a few bad days on the stock market here. Do you see bigger problems here though?

SUMMERS: My issue is not the turmoil of the last few days. My issue is looking at the broad economy. The Fed's got three primary objectives - price stability, full employment and financial stability. Right now inflation is running below its 2 percent target and is expected - according to markets - to run below that target for nearly 10 years or more. Right now we've still got large numbers of people looking for work. And we have no evidence of the kind of rapid wage inflation that we'd have if there were labor shortages, outside of a few uncertain sectors. Right now it's obvious from your headlines this morning that our problem is not overconfidence and obliviousness to risks in financial markets. So there's no need for the Fed to send a shot across investors' bow.

The base of those three things, the - I don't see the case for a rate increase. Seems to me that there's as much or more argument for the accelerator as there is for the brake.

INSKEEP: But let me ask about that because there was 10 percent unemployment a few years ago when interest rates were pushed down near zero. If near-zero interest rates are right for 10 percent unemployment, how can they also be right when there's 5.3 percent unemployment? There has been a lot of change in the last few years.

SUMMERS: There certainly has, but I'd beg these points - first, if it had been possible to do more with expansionary policy, it would have been desirable. Certainly in 2009, if the interest rate had been 3 percent, it would've been a good idea to bring it way down below 3 percent. Unfortunately there's what economists refer to as the zero lower bound. People will just store currency. You can't lower interest rates much below 0 percent.

INSKEEP: Zero is 0, right.

SUMMERS: Second, there's just the reality of, why do you want to hit the brakes? You hit the brakes if you think that you're in danger of having excessive inflation or you think you're in danger of having bubbles. And we may have been reasonable to worry about bubbles six months ago, but surely, with the highest five-day increase in market volatility ever, that's not the moment that we need to kind of get people more alarmed about bubbles. And you don't see it in the inflation statistics. I said this months ago. I said the Fed should not raise rates until it sees the whites of the eyes of inflation, and I don't think they're there yet.

INSKEEP: OK. You've said it's unwise to raise rates now, or unnecessary to raise rates now, but you've written something more in a couple of op-eds in The Washington Post and Financial Times. You've said that raising rates now could tip some part of the financial system into crisis. That sounds scary. What would the crisis be?

SUMMERS: We got - I think we got a taste of the kind of thing that crisis represents in markets yesterday. It's marked by extraordinary volatility. It's marked by investors rushing to get into cash, forcing the sale of assets. And then when there's forced sales, that leads to declines in prices which leads to more alarm, which leads to more selling, which leads to more decline in prices. And what we know is that there's extensive and complicated interconnection of a kind - that for all their best efforts, regulators don't completely understand. No one expected that a relatively small $4.5 billion hedge fund, LTCM - long-term capital management - that failed in 1998, would have cascading consequences in the way that it did. No one expected that - very few people expected that subprime, a limited sector of the mortgage market, even if it got into trouble would have the kind of catastrophic consequences that it did.

INSKEEP: Secretary Summers, we've just got a few seconds left here. I want to ask if you think we're riding a tiger here. Interest rates have been near zero, people can't save money so they've had to invest in the stock market. And now it's going to be hard to get out of that pattern. It's almost like a stock bubble here.

SUMMERS: Yeah, but this is not the moment to be making that kind of adjustment.


SUMMERS: And whenever you make that kind of adjustment, you've got to think about what's happening with the real economy and take other steps to assure there's enough demand to create full employment. That's why I've been an advocate for so long of a major increase in infrastructure investments and major measures to promote private investment through regulatory tax policy.

INSKEEP: All right. Secretary Summers thanks very much for your insights this morning.

SUMMERS: Thank you.

INSKEEP: Lawrence Summers, former treasury-secretary economic adviser to President Obama. Let's get in a better mood here with music from Yo La Tengo. Transcript provided by NPR, Copyright NPR.