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As the financial markets exit the crosscurrents of year-end factors and enter the New Year in full, a clear resolution to the question of a continuation of the bear in stocks that started this past spring should emerge. Accordingly, a useful perspective from this commentary should be of value. And while there are much and many reasons to find fault with Mr. Summers and his advice and opinions of the past, this modestly verbose commentary is well worth the read. After all, even a broken clock is right twice a day.
 

Larry Summers: What the Fed should do next on inflation

By Lawrence H. Summers, Contributing columnist

December 19, 2022 at 4:25 p.m. EST

The debate over U.S. monetary policy is in a new phase. There is no longer any question that the Fed allowed itself to fall way behind the curve in the second half of 2021 and early 2022, calling its credibility into question. It is equally clear that, as its critics urged, the Fed has since moved aggressively to contain inflation by raising rates and quantitatively tightening. After these steps, along with the president’s releases from the Strategic Petroleum Reserve and some good luck, the Fed has regained its credibility as an inflation fighter.

Unfortunately, all major reductions in inflation in the past 70 years have been associated with recessions. It should come as no surprise that many economists, including me, expect a recession to begin in 2023. Historical experience as encapsulated in the proposition known as the Sahm Rule demonstrates that whenever U.S. unemployment rises by more than half a percent within a year, it goes on to rise by 2 percent. So, if recession comes it is very likely to lift unemployment to the 6 percent range.

What should the Fed do next? The choices from here get harder, not easier, as both the risk of a severe recession and enduring inflation make policymaking more challenging. Chair Jerome H. Powell was right in his Dec. 14 news conference to emphasize that there is no basis for confident economic prediction.

Continue reading at The Washing Post.

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