Summers: "US Inflation Nears Peak... Powell Must Implement High-Intensity Tightening Like Volcker" [Era of Ultra-Tightening]

[Asia Economy New York=Special Correspondent Seulgina Jo] "High-intensity ‘disinflation’ measures similar to those taken by former Federal Reserve (Fed) Chairman Paul Volcker are necessary."

Larry Summers, a Harvard University professor and former U.S. Treasury Secretary, urged the Fed to adopt even more aggressive tightening measures to curb soaring inflation.

According to the National Bureau of Economic Research on the 9th (local time), Summers and other economists released a paper recalculating past U.S. inflation to reflect modern consumption patterns. Summers was the person who accurately predicted that U.S. inflation would become a bigger problem when Jerome Powell, Fed Chairman last year, underestimated inflation as a temporary phenomenon.

In the new paper, Summers pointed out that past U.S. Consumer Price Index (CPI) did not accurately reflect housing-related expenses, including mortgages. Applying the new calculation method to the U.S. CPI, which soared to 13.6% in June 1980 due to the oil price surge, results in 9.1%. Considering that the U.S. CPI was 8.3% in April, recent inflation is not significantly different from the situation in the 1970s-1980s right after the oil shock.

This also means that today’s Fed faces challenges similar to those during the Volcker era in the 1980s. So far, some in the market have argued that inflation in the 8% range does not require excessive rate hikes because it is lower than the double-digit inflation of the Volcker era.

Summers said, "The current inflation level is much closer to the historical peak than the officially announced figures," and recommended that the current Fed led by Chairman Powell undertake bold tightening comparable to the Volcker era.

Volcker, famous as an ‘inflation fighter,’ took office as Fed Chairman in the late 1970s during stagflation and implemented harsh tightening by raising interest rates from 12.2% to 22%?an increase of about 10 percentage points?in just 1 year and 3 months (September 1979 to December 1980).

During this process, many companies went bankrupt due to the recession, and the unemployment rate soared to 10%. However, despite facing numerous threats, he did not stop the tightening measures, and as a result, inflation was subdued. Volcker’s decision at that time is now regarded as the foundation that led to the U.S. economic boom in the 1990s.

Chairman Powell has also mentioned Volcker several times this year, seemingly aware of the soaring inflation and last year’s misjudgment. Before the rate hike in March, he praised Volcker as an excellent bureaucrat during his appearance before the U.S. Congress. This is interpreted as emphasizing his determination to push forward with monetary tightening like Volcker did, even at the risk of a recession.

This content was produced with the assistance of AI translation services.