Former US Treasury Secretary Lawrence Summers thinks that claims by Donald Trump that the Federal Reserve is delaying interest-rate rises, in order to help out Hillary Clinton, his rival for the US presidency, are “ludicrous”.
In Summers’ view, the reality is that below-target inflation in the US, and low inflation expectations among consumers, mean that “now’s not the time to be stepping on the brakes”. He believes that the US is in the middle of a “secular stagnation” – a long-term period of very low or non-existent growth – which means that rates can remain at or near zero without risking a take-off in inflation.
As for decent employment data, Summers argues that the figures disguise the fact that “a large number of people have withdrawn from the labour market”. He also points out that “total hours worked have been flat for the last six months”.
However, while he doesn’t want monetary policy to be tightened, he accepts that further monetary loosening may not be possible. In the past, the Fed has responded to recessions by slashing rates by a full five percentage points, which is clearly not possible from these levels. He also doubts that future quantitative easing would involve the Fed buying stocks, even though Janet Yellen has mentioned the idea.
Instead, Summers believes there is a strong case for “more use of fiscal policy” (government spending). He is particularly keen on the idea of boosting infrastructure spending. Not only would this help create jobs in the short run, but it could also boost productive capacity and “remove the deferred maintenance liability” from the public balance sheet. Indeed, the case for infrastructure spending is so powerful that Summers hopes “an agreement can be reached whoever controls the White House and Congress” after the election.