Summers asserts that the Federal Reserve’s interest rate hikes are not as effective as they were in the past.
Summers spoke after data released Friday that showed US payrolls surged by almost double what economists had expected for September. The 336,000 gain came on top of upward revisions to hiring for the prior two months, though the report also featured a slowing in wage gains.
“You’ve got to recognize that these are good numbers, but I can’t say that they give anything like assurance of a soft landing,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV.
The pickup in hiring comes one and a half years after the Fed kicked off its most aggressive monetary tightening campaign in decades, with more than 5 percentage points of rate hikes. Summers said the economy’s performance suggests some underlying shift in the effectiveness of Fed policy.
“We may be living in a world where the interest rate is less of a tool for guiding the economy than it used to be,” Summers said. “That means when things need to be cooled off, interest rates are going to have to be more volatile than they have been in the past.”
He also warned that, with the current selloff in the bond market alongside risks from China and elevated valuations in many markets including private equity, “I see more dry tinder for financial flames than I’ve seen in quite a long time.”
