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Larry Summers urges Fed to confess unemployment will rise, end ‘confusion’

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The Federal Reserve is causing “confusion” amongst investors by avoiding a transparent declaration that unemployment is more likely to rise during its fight against inflation, in accordance with ex-Treasury Secretary Larry Summers.

Summers, a frequent critic of the Fed’s handling of inflation, detailed his concerns as Fed Chair Jerome Powell prepares to deliver pivotal remarks later this week at an economic conference in Jackson Hole, Wyo.

“My worst fear can be that the Fed will proceed to be suggesting that it may have all of it by way of low inflation, low unemployment and a healthy economy,” Summers said during an appearance on Bloomberg’s “Wall Street Week” in remarks published Monday.

Larry Summers urged the Fed to be more clear in regards to the uncomfortable side effects of its policy tightening.AFP via Getty Images

Powell will address the Fed’s current view of the economy as investors seek clarity on the central bank’s next move. The market is currently pricing in a 54.5% probability of a three-quarter-percentage-point hike on the Fed’s next meeting in September as officials aim to tame inflation while still avoiding a lengthy economic slowdown.

Summers asserted that Powell must be honest in regards to the undeniable fact that tightened economic policy will almost certainly lead to job losses. The dearth of a transparent message would depart the market “very much doubtful about what lies ahead” and will further harm the Fed’s credibility, he added.

“The truth is that it’s probably not so realistic to think” the Fed can “get inflation all the best way down without unemployment up — they usually don’t wish to acknowledge that,” Summers said. “That forces a certain confusion into all of their statements.”

The national unemployment rate was just 3.5% through July, in accordance with probably the most recent jobs report. At present, the Fed projects unemployment will reach just 4.1% by 2024, at the same time as it implements a series of sharp rate hikes that may weigh on the budgets of US firms.

Meanwhile, Summers, who served as an economic adviser to President Barack Obama, has argued that unemployment can have to rise to at the very least 5% to successfully tackle inflation — and potentially much higher.

He identified that US markets have rallied in recent weeks — an indication that investors don’t yet see the Fed’s effort to chill the economy through rate hikes as restrictive.

Jerome PowellJerome Powell is predicted to reiterate the Fed’s commitment to addressing inflation.Getty Images

“My hope is that we are going to get clarity that policy will not be yet restrictive, that it must be restrictive if we’re going to contain inflation, and that we’ll need to simply accept the implications of that,” Summers added.

Powell is widely expected to reiterate the Fed’s commitment to bringing down inflation during his remarks in Wyoming, that are set to occur on Friday.

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