Former Treasury secretary warns Fed may be forced to raise interest rates

Former U.S. Treasury Secretary Lawrence Summers warned that the Federal Reserve will likely be pressured into raising interest rates sooner than markets expect, and perhaps as early as next year.

An overheating economy and rising prices could force the Fed’s hand, Summers said in an interview with David Westin for Bloomberg Television’s “Wall Street Week” to be broadcast Friday.

Summers, a top official in the past two Democratic administrations, has emerged as one of the leading critics among Democrat-leaning economists of President Joe Biden’s $1.9 trillion pandemic plan. He’s argued that the measure will pump too much cash into the economy, pushing it past capacity limits and triggering inflation, and called for a focus on longer-term investments instead.

Administration officials have pushed back against the critique, saying the Biden bill aims to provide relief to those in need and won’t overheat an economy still suffering from high unemployment. Fed officials have broadly echoed that view — flagging the risk of delivering too little fiscal support, and signaling they have no intention of tightening monetary policy anytime soon.

That stance shows Fed officials are “not recognizing the era they are headed into,” said Summers, who’s a paid contributor to Bloomberg. He said the central bank will soon face the same challenges that it did in the 1970s, when it failed to get a grip on inflation.

“If the Fed wants to not fail, they’re going to have to start recognizing the reality of those challenges,” Summers said. “That’s going to mean a significant change in their tone.”

Summers said the Biden proposals will channel too much money onto household balance sheets, such as stimulus checks that will likely be saved, instead of investing to expand the economy’s productive capacity. “I can’t imagine a lower-priority use of federal resources than improving consumer balance sheets,” he said.

The Biden administration plans to move on to legislation that will boost investment in infrastructure and clean energy after the coronavirus relief package is passed.