(Bloomberg) -- Former Treasury Secretary Lawrence Summers backed the Federal Reserve’s current monetary policy stance while suggesting that its next interest rate move will probably be down.
With financial markets betting that the Fed is “considerably more likely’’ to reduce rates than hike them, “that’s as far as I would think it should go in an expansionary direction today,’’ Summers said on Monday at the Peterson Institute for International Economics in Washington.
President Donald Trump and his advisers want the Fed to go further. They’re calling on it to cut interest rates, arguing that the central bank is needlessly restraining economic growth at a time of low inflation.
Summers called the stance of both U.S. monetary and budgetary policy “broadly appropriate’’ and said there’s no need for either fiscal consolidation or expansion.
He did though criticize Trump’s tax cuts, arguing that they had aggravated income inequality while doing little for the economy. He also bemoaned the paucity of public investment and said that would prove “very costly’’ for the U.S. in the long run.
“There is plenty in U.S. fiscal policy that I think is quite misguided,’’ said Summers, who is now a professor at Harvard University. “I would favor substantial adjustment” in its make-up, if not its overall budgetary thrust.
Summers said the economy was much more brittle than commonly believed and he saw a risk that the next recession could turn out to be a deep one.
He said the Fed and the Treasury should be making plans now on how they’ll work together if the central bank is again forced to cut interest rates to zero to counter a downturn.
“Planning for greater Treasury-Fed cooperation in the event that we have another zero lower bound episode is something that I think should be part of the Fed’s contingency planning,’’ Summers said.
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