Former US Treasury Secretary Lawrence Summers warned against allowing the president to influence the design of US monetary policy, as this could only harm the economy in the long term.
“Involving politicians is a fool’s game,” Summers said on Bloomberg Television Wall Street Week with David Westin on Friday. “The result is higher inflation and a weaker economy.”
Summers spoke a day after Republican presidential candidate Donald Trump said he firmly believes the president must have some “say” in setting Federal Reserve policy. The former president, who pushed Chairman Jerome Powell to ease policy during his tenure, said policymaking is a “gut feeling” and that he himself has “better instincts in many cases” than the Fed chairman and other top officials.
“I was really appalled at what a bad idea this was,” Summers, a Harvard University professor and paid contributor to Bloomberg TV, said of Trump’s proposal. “A president has a lot to do at any given time and is actually much less in touch with the economy” than the 19 Fed board members and presidents who concentrate on continuously checking every economic statistic, he said.
There was no immediate response from the Trump campaign team to a request for comment.
Summers stressed that countries around the globe have given their central banks independence over time because they recognized that there may be “a profound conflict of interest” for politicians on the subject of monetary policy. Politicians will “always succumb to the temptation to print more money, lower interest rates – to put the pedal to the metal to stimulate the economy,” he said.
Such pressure increases people’s inflation expectations and drives up long-term rates of interest, says Summers, who held top economic positions within the Democratic administrations of Bill Clinton and Barack Obama. “Inflation is rising, but production is not increasing substantially.”
Summers pointed to the instance of former President Richard Nixon, who pushed then-Fed Chairman Arthur Burns to loosen monetary policy within the early Seventies, triggering costly inflation. Boom-bust cycleHe also pointed to “countless” cases in Latin America – where in recent times many economies have seen a shift towards independent central banks this has dampened inflation.
As for the Fed’s current policy, the previous Treasury secretary said that given the easing of market volatility and the sell-off in stocks since Monday’s turmoil, any emergency rate cut wouldn’t be justified “based on the current facts.”
“An emergency response would be knee-jerk, panicked, overheated and counterproductive,” he said. Still, “a 50 basis point cut might be appropriate” on the September monetary policy meeting, he said.
Powell said last week, before the sharp drop in stock prices that culminated in a 3 percent drop within the S&P 500 on Monday, that a half-percentage point decline was “not something we’re thinking about right now.”
