Larry Summers: The Fed Needs to Keep Interest Rates Where They Are

Economist and Big Think expert Larry Summers took to his personal blog today to argue that a potential Federal Reserve interest rate hike would be a major mistake.

If you haven’t been following the high-speed dynamic excitement of Federal Reserve rate debates, I can hardly blame you. Put simply, the Fed has kept interest rates at near all-time lows for the greater part of a decade, mostly to nurture a slow-rebounding economy. Now, with last month’s Wall Street scare casting a shadow on an uncertain future, it appears somewhat likely that Fed Chair Janet Yellen and her pals will trigger a series of rate increases when they meet to talk policy later this month.

Summers presents five key points in support of his idea, among them being that the American and world economies have slowed their growth.

The Fed has felt pressure for years from plenty of outlets and economists who argue that rate hikes will spur productivity and protect the economy should another recession materialize in the coming year. The USA Today editorial board, for example, argued that the American economy is finally durable enough to sustain a rate increase; thus, the era of unprecedented low rates (which contributed, in part, to the housing bubble) ought to end.

But Summers, who many thought a few years ago might end up with the job that eventually went to Yellen, takes the opposite opinion. He presents five key points in support of his idea, among them being that the American and world economies have slowed their growth, thus lowering inflationary risks. He also disagrees that the American economy is ready for such change:

Summers accuses those at the Fed who support rate increases of working to elevate their credibility “over responding to clear realities.” Basically he wants them not to give into outside pressure to take action just because it looks like the right thing to do. The actual right thing to do, he says, is much less flashy: pretty much nothing. According to Summers, standing pat gives the Fed its best chance “to support a fully employed American economy achieving its inflation target with stable financial conditions.”

As far as government and extra-government institutions go, the Fed is about as esoteric as they come. Summers does well to make his arguments as straightforward and simple as possible. He concludes with the belief that risks and fears of collapse in 2015 and 2016 are overblown and that we’re in a decent enough position now to continue on a course toward stability. But should those fears be founded, the Fed’s tinkering could result in “catastrophic error.”