Speaking at an investment conference on Wednesday local time, Summers said the various stimulus policies during COVID-19 turned US inflation from 2% to 5%. He argued that unless the US economy slows sharply, it will be difficult to approach the 2% inflation target.
Earlier this month, Summers said the likelihood of a US recession is increasing and the pace of Fed rate hikes is coming to an end. "It's clear that we are in the final stages of the current tightening cycle. Whether further action is necessary is a judgment I think they should wait until the last minute to make."
Summers reiterated his previous view that the Fed has lost credibility because it is "behind the curve" in fighting inflation and that curbing inflation could lead to a "major" recession.
Considering the current complex situation, the future path of monetary policy is not so clear, and need to wait for further clarity.
For the recent banking crisis, he said the consequences are leading to a "credit crunch", which to some extent played a role in the Fed's interest rate hikes. "If the banking system is working properly, we don't need to raise interest rates that much more." But he did not answer the question of whether the financial turmoil is over, as he did earlier.
At one point during Wednesday's session, First Republic Bank's decline widened to nearly 40%, sparking renewed panic in the market as investors worried that the bank was also headed for bankruptcy. According to sources, the White House or Treasury Department seem reluctant to pressure banks to develop asset sale plans for First Republic Bank.
Summers believes telecommuting is here to stay, which will lead to less demand for commercial real estate, but the sector is just one part of the massive U.S. economy. The U.S. economy is still doing well relative to other countries.
On the debt ceiling, Summers was optimistic, saying that the likelihood of a government default is "less than 2%. US House Speaker Kevin McCarthy plans to vote this week on a bill that would raise the debt ceiling in exchange for deep spending cuts.
Yellen, the current US Treasury Secretary, warned Tuesday that if Congress does not address the debt ceiling, there will be serious economic consequences, and in the long run, a default will raise the cost of borrowing. Yellen reiterated that Congress should unconditionally raise or suspend the debt ceiling.