(Bloomberg) — Former Treasury Secretary Lawrence Summers said that the Federal Reserve ought to hold an immediate meeting to end its quantitative easing program — now scheduled to end next month — to underline its determination to tame inflation.
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“The Fed should have a special meeting, right now, to end QE,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “It is nothing short of preposterous that in an economy with 7.5% inflation, that in an economy with the tightest labor market we’ve seen in two generations, that the central bank is still as we speak growing its balance sheet.”
Summers spoke a day after the January consumer-price index report showed a bigger-than-expected jump in inflation, with gains reflecting broad increases that included higher food, electricity and housing costs.
“This confirms just how far behind the curve the Fed has gotten,” Summers, a paid contributor to Bloomberg who’s a professor at Harvard University, said of last month’s 7.5% annual pace of inflation. “The Fed could show that at last it really gets it” by meeting now to end its bond purchases “tomorrow,” he said.
Fed policy makers are widely expected to begin raising rates next month at their March 15-16 meeting, shortly after the scheduled end to its bond-purchase program.
“It’s a close call on the March meeting” — whether the Fed ought to boost its benchmark by a quarter or a half percentage point — Summers said.
Financial markets may increasingly build in expectations for a 50 basis point move, he said. “If they do, I don’t think the Fed should be surprising them on the dovish side. And I don’t think the Fed should be trying to guide them to the dovish side.”
Citigroup Inc., Deutsche Bank AG and HSBC Holdings Plc have all recently joined Nomura Holdings Inc. in predicting that outcome for next month.
“There’s a good chance that there’s going to be a progression towards near-inevitability of the 50 basis points — and if so, that’s OK,” Summers said. “But if markets don’t go that way, I also don’t think that is terrible.”
(Adds view on size of March rate hike, in final four paragraphs.)
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