Summers Says Next Recession Will Likely Be Caused by the Fed

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Former U.S. Treasury Secretary Lawrence Summers said the next U.S. recession will likely be caused by the Federal Reserve.

Even as Fed Chair Jerome Powell cements plans to hike interest rates this month, Summers told Bloomberg Television on Wednesday that the central bank was “way behind the curve” and would ultimately need to tighten monetary policy by more than it or financial markets currently envisage.

“The next recession probably has ‘mistaken monetary policy' written all over it,” Summers said. “The difficulty of getting a soft landing where we both brought inflation down and we avoided recession was always very difficult. With $110 oil it's that much more difficult.”

Inflation in January hit the fastest in four decades, validating Summers's warnings last year. He had said price pressures risked running out of control, with the Fed signaling a willingness to let the economy heat up in the hope that would propel a stronger labor-market recovery.

“One of the reasons it's costly when you're behind the curve is sometimes you can get shocks that make it harder for you to act,” said Summers, a paid contributor to Bloomberg TV. “I don't think the Fed has any alternative now but to mount a strong response to inflation at a time when we are at -- or over -- the brink of a spiral of rising inflation breaking out.”

‘Way Excessive'

“The Fed's obsession with a high-pressure economy was way excessive,” he said.

Asked about a proposal by strategists at Deutsche Bank AG for the European Central Bank to intervene in markets to strengthen the euro, Summers said he doubted “the track record on currency intervention is very encouraging” and that the U.S. would be unlikely to participate.