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Former U.S. official says Fed may be forced to raise interest rates next year

Feb 20, 2021 01:20:14 PM 

Former U.S. Treasury Secretary Lawrence Summers on Friday warned that the Federal Reserve could be forced to raise interest rates next year sooner than Fed officials and markets expect.

"I'd expect rate hikes to be well underway by the end of 2022" due to rising inflation and perhaps an overheating economy, Summers said in an interview with Bloomberg Television.

"Returning to more normal interest rates could be OK, but it's going to be a very challenging transition," Summers said, believing that Fed officials are "not recognizing the era they are headed into."

The central bank will soon face the same challenges that it did in the 1970s, when it failed to rein in inflation, said Summers, who was treasury secretary for former President Bill Clinton and economic adviser to former President Barack Obama.

"If the Fed wants to not fail, they're going to have to start recognizing the reality of those challenges. And that's going to mean a significant change in their tone," he said.

In recent weeks, Summers has repeatedly warned that President Joe Biden's 1.9-trillion-U.S. dollar COVID-19 relief package could bring big risks, including the possibility of setting off inflationary pressures of a kind "we have not seen in a generation," with consequences for the value of the dollar and financial stability.

However, Biden administration officials have downplayed inflation worries, arguing that a large relief package is still necessary to get the economy back to full strength.

"Inflation has been very low for over a decade, and you know it's a risk, but it's a risk that the Federal Reserve and others have tools to address," U.S. Treasury Secretary Janet Yellen said Thursday in an interview with CNBC.

"The greater risk is of scarring the people, having this pandemic take a permanent lifelong toll on their lives and livelihoods," Yellen said.

"We think it's very important to have a big package (that) addresses the pain this has caused -- 15 million Americans behind on their rent, 24 million adults and 12 million children who don't have enough to eat," she added.

The Fed on Friday pledged that monetary policy will continue to "deliver powerful support" to the economy until the recovery is complete, signaling the central bank would not prematurely tighten monetary policy.

"Tightening monetary policy in the absence of evidence of excessive inflation pressures may result in an unwarranted loss of opportunity for many Americans, whereas if an undue increase in inflation were to arise, policymakers would have the tools to address such an increase," the Fed said in its semi-annual Monetary Policy Report submitted to the Congress.

The central bank last month decided to hold its policy rate near zero and continue its asset purchase program at least at the current pace of 120 billion dollars per month until it sees "substantial further progress" in employment and inflation.

In the Fed's latest economic projections released in December 2020, most Fed officials expected that interest rates would remain near zero at least through 2023.

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