Advice for the Federal Reserve

In an op-ed in the Washington Post Lawrence Summers gives his advice to the Federal Reserve:

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.

and

It is very unlikely that we will have a recession so severe as to drive the underlying inflation rate below the 2 percent target. Hence, overshooting on inflation reduction is not the primary risk, and the Fed is right to emphasize its inflation objective going forward.

However

Fiscal policy will need to respond if and when recession comes. There will not be room for massive, across-the-board efforts. But now is the time to put in place carefully targeted measures to refund child tax credits, strengthen unemployment insurance and be ready to pull forward federal spending on maintenance and replacement cycles to periods when overall demand is soft.

The challenge in that is that any additional spending fueled by borrowing (“printing money”) will aggravate the present situation which, simply stated, is that too many dollars are chasing too few goods and services. My own view is that we need to produce more of what we consume and that’s where the White House’s focus should be. Since I don’t believe that’s politically possible and would be very unpopular within the president’s own caucus to boot, I don’t think it will happen.

What I do think will happen is that fiscal policy and monetary policy will be at cross-purposes.