Former US Treasury Secretary Summers: Fed policy should not be subject to political interference, emergency rate cuts make no sense
Former US Treasury Secretary Summers warned against incorporating the President's influence in US monetary policy, stating that it would harm the economy. Trump had previously stated that the President should have a say in Federal Reserve policy. Summers pointed out that politicians have conflicts of interest in monetary policy, and central banks around the world have been granted independence. He mentioned Nixon's example, where loosening monetary policy led to an inflation cycle. Summers stated that an emergency rate cut makes no sense, as market volatility has eased. In conclusion, Summers warned against political interference in Federal Reserve policy
According to the financial news app Zhitong Finance, former US Treasury Secretary Lawrence Summers warned against incorporating any president's influence in the formulation of US monetary policy. He stated that over time, this will only harm the economy. Summers said, "Involving politicians is a foolish game. The end result is higher inflation and a weaker economy."
It is reported that US Republican presidential candidate Trump stated on Thursday that he strongly believes the president should have some "say" in the Federal Reserve's policy-making. Trump had previously urged Fed Chairman Powell to ease policy during his tenure as US president. Trump said that policy-making is an "intuition," and that he often has "better intuition" than the Fed chairman and other senior officials in many cases.
In response to Trump's remarks, Summers said, "I am truly shocked at how bad an idea this is." "The president has many things to do at all times. In fact, his understanding of the economy is far less than that of the Fed policy makers, who focus on constantly examining every economic statistic."
Summers stated that over time, countries around the world have recognized that politicians have "deep conflicts of interest" in monetary policy, hence granting independence to central banks. He said that government officials "always want to print more money, lower interest rates, step on the gas pedal to boost the economy." He mentioned that this pressure raises people's expectations of inflation, pushes up long-term interest rates, "intensifies inflation, but output does not grow substantially."
Summers cited former US President Nixon as an example. In the early 1970s, Nixon pushed then-Fed Chairman Burns to loosen monetary policy, triggering a costly inflation boom-bust cycle. He also mentioned "countless" examples in Latin America—many Latin American economies have turned to independent central banks in recent years, thereby curbing inflation.
As for the current policy calls of the Federal Reserve, Summers stated that given the easing of market volatility and stock market sell-offs since Monday, "based on current facts," any emergency rate cut is unreasonable. He said that an emergency rate cut would have a counterproductive effect. He also added that a "50 basis point rate cut at the September policy meeting may be appropriate."