Larry Summers, who was very nearly chairman of the Federal Reserve, thinks there is almost no reason for the Fed to raise rates right now.
Writing in The Financial Times on Monday, Summers argues that the Fed will be risking setting off a financial crisis by electing to raise rates at some point this year — which the Fed has made clear it plans to do.
Here’s the heart of Summers’ impassioned case against the Fed doing anything:
There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks and businesses to borrow money and engage in financial engineering. At the time, I believed that the economic costs of a rate increase exceeded the financial stability benefits, but there were grounds for concern. That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence. The Fed does not have to do the job. At this moment of fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results.
You’ll recall that about 2 years in a speech before the IMF, Summers re-introduced the idea of “secular stagnation.”
Since then, “secular stagnation” has basically become a catch-all for the idea that the economy is stuck in — and will remain stuck in — a low growth range for the foreseeable future.
Summers has argued that what the economy needs is increased public and private investment, and makes a similar case in his latest for the Fed to sit tight.
On Monday morning, stocks were selling off around the world amid fears of just about everything, among them the Fed tightening its target interest rate for the first time in 9 years.
And in the view of at least one prominent Fed watcher, doing nothing is the only sensible thing right now.