Summers: Don’t Raise Interest Rates

Lawrence Summers argues that “a reasonable assessment of current conditions suggests that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives: price stability, full employment and financial stability.”

“The pressure to increase [rates] comes from a sense that the economy has normalized during the 6 years of recovery and so the extraordinary stimulus represented by 0 percent interest rates should be withdrawn. This has been a consistent theme for the Fed, with much talk of ‘headwinds’ that require low interest rates now but will abate in the not too distant future, allowing for normal growth and normal interest rates.”

“Whatever merit the theory of temporary headwinds had a few years ago, it is much less plausible as we approach the seventh anniversary of the collapse of Lehman Brothers … Much more plausible than ‘temporary headwinds’ is ‘secular stagnation’ or the very similar idea that Ben Bernanke has put forward of a ‘savings glut.’”

“New conditions require new policies. There is much that should be done, like major steps to promote both public and private investment, to raise the level of real interest rates consistent with full employment. But until and unless these new policies are implemented, inflation sharply accelerates or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.”