Former US Treasury Secretary Lawrence Summers warned of the dangers of a “spontaneous deflating of financial markets” that have been inflated by retail buying and irrational investors.
Summers remarked at an American Council for Capital Formation webcast on Tuesday that there is “a lot of enthusiasm,” referring to cryptocurrencies, so-called meme stocks, and technology stocks, among other things. “Extremely ecstatic shopping is frequently a symptom of impending danger,” he noted.
Summers, a paid consultant to Bloomberg and a Harvard University professor, recognized possible red flags in the activities of more experienced investors.
“Many are pursuing yield by taking on additional risk,” he said. “Extremely sophisticated endowments and pension funds behave in this manner.” Insofar as that is occurring, it indicates a trend that may or may not be persistent.”
Stock prices fell on Tuesday as investors awaited the outcome of the Federal Reserve’s final policy-making meeting of the year on Wednesday. According to economists polled by Bloomberg News, central bank officials are likely to increase the Fed’s bond-buying pace to $30 billion per month, ending in March, while expecting two interest-rate raises next year.
Summers, who has been warning about the perils of high inflation for months, believes it will be difficult for the Fed to rein in unsustainable price increases without harming the economy.
“The Fed will have a very difficult time organizing a soft landing,” he said, pointing out the long and variable lags between financial actions and their economic impact. “All of our previous efforts at falling prices, where it was plainly demonstrated that pricing was too high and the Fed moved, have resulted in recession.”
He urged the Fed to stop buying loan securities immediately and to end its buying of Treasury paper “probably by the end of February.”
“I would be constructing an assumption that the Fed will do whatever is important to bring inflation under control, which could include four rate increases over the next year and more after that,” he said.