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Larry Summers says Fed’s hawkish signals this week were ‘all to the good’

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The Federal Reserve was right on Wednesday to lift its inflation forecast and signal that it might hike interest rates earlier than it had previously expected, said former U.S. Treasury Secretary Larry Summers on Friday.

“I was a bit encouraged by what the Fed did on Wednesday,” Summers told reporters during a virtual event hosted by the National Press Foundation.

“They basically signaled that they were revising their inflation forecast way up, and that they were indicating that they thought it was likely that they would raise rates earlier than they had previously thought,” he added.

“I thought that was all to the good and appropriate.”

See: Fed, alert to risks of higher inflation, now sees two interest rate hikes in 2023

Summers, a Harvard University professor, earlier this year said the U.S. central bank should be expressing more concern about inflation.

He also has been criticizing the Biden administration’s spending in response to the COVID-19 crisis, warning it’s too much and will lead to higher inflation. He reiterated such concerns on Friday.

“If your car is driving 92 miles an hour down the highway, does that mean you’ve got like a great car and you’re having a great ride?” Summers said.

“Or does that mean you’re doing things that might not be sustainable and raise the risks of accident? That’s, I think, the important question about the U.S. economy. And my own view is that we’re taking substantial risks of overheating the economy and having excessive inflation and/or having an overly sudden stop.”

The former Treasury boss described the economic situation as “a complicated problem, where it’s necessary to take off, but it can be easier to take off, than to land.”

U.S. stocks
SPX,
-1.05%

DJIA,
-1.30%

traded sharply lower Friday as investors digested remarks from St. Louis Fed President James Bullard, who said he expects an interest-rate hike in 2022.