Must-Read: Larry Summers: Less is more when it comes to Federal Reserve policy

Must-Read: The Federal Reserve has managed to get the sailing ship that is the economy 200 yards from a rocky coast in hurricane season: it will be able to do little to boost demand in the event of any adverse shock. The way I see it, the Federal Reserve should be desperately trying to boost inflation now so it can raise interest rates in the future so that it has policy room to maneuver whenever the next adverse macroeconomic shock comes.

But they do not see it that way:

Larry Summers: Less is more when it comes to Federal Reserve policy: “The next couple of years are likely to see slower GDP growth and possibly a tendency to rising inflation… https://www.ft.com/content/ab77d236-318c-11e7-9555-23ef563ecf9a

…What does this mean for monetary policy? The assumption manifest in the statements of the Fed and most commentary is that policy should be tightened over time through rising interest rates and a reversal of quantitative easing. Perhaps, but tightening involves real dangers and needs to be carried out with great care. The Fed has committed itself to a symmetric 2 per cent inflation target and inflation has been below 2 per cent for eight years. If a booming economy in the ninth year of recovery with this prelude is not the time for inflation above 2 per cent, when would such a time arise?

Moreover, economists should now have great humility regarding the inflation process…. Price inflation remains very much under control…. Wage growth in excess of price growth would be desirable…. The Fed will have little room to respond if it overdoes things and the economy goes into recession. Sometimes the hardest and most important decisions in government involve doing less rather than more. This is one of those times for the Fed. Caution should be its watchword…