Summers warns markets risk ‘spontaneous deflation’
(Bloomberg) – Former US Treasury Secretary Lawrence Summers has warned of the risk of a “spontaneous deflation in financial markets” which have been inflated by retail buying and exuberant investors.
There’s “a lot of euphoria,” Summers said during an American Council for Capital Formation webinar on Tuesday — pointing to, among other things, cryptocurrencies, so-called meme stocks and tech stocks. “Super hyped retail is usually a sign of trouble ahead,” he added.
Summers, who is a paid Bloomberg contributor and a Harvard University professor, also saw potential signs of trouble in the stocks of more seasoned investors.
Read more: GameStop, AMC Drag Meme Group at 7-month low as risk appeal wanes
“There are a lot of them who are looking for yield by taking on extra risk,” he said. “Highly sophisticated endowments and pension funds behave this way. To the extent that it occurs, it indicates something that may or may not be lasting. »
Stock prices fell on Tuesday as investors awaited Wednesday’s results from the Federal Reserve’s final policymaking meeting of the year. Central bank officials are expected to double the pace of reductions in Fed bond purchases — to $30 billion a month, ending in March — while planning two interest rate hikes next year, according to economists polled by Bloomberg News.
Summers, who has been warning of the dangers of high inflation for months, said it would be very difficult for the Fed to rein in excessive price gains without also hurting the economy.
“The Fed will be very hard pressed to stage a soft landing,” he said, noting the long and variable lags between monetary policy actions and their impact on the economy. “Any disinflation effort that we’ve had historically, where inflation was clearly shown to be too high and the Fed acted, ended in a recession.”
He called on the Fed to immediately stop buying mortgage-backed securities and end its purchases of Treasury debt “probably by the end of February.”
“I would establish a presumption that the Fed will do whatever is necessary to get inflation under control, and that very likely could involve four rate hikes over the next year and more thereafter,” he said. he declares.
©2021 Bloomberg LP