Lawrence Summers: Tempting for the Fed to move slowly, that would be a grave error - Washington Post

The Federal Reserve would want to move cautiously in a highly uncertain and politicized environment. That, however, would be a grave error as the odds of recession beginning next year, while still less than 50%, now appear significant and increasing, according to Lawrence H. Summers – treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010.

Key points (Source: Washington Post)

While the headline number for first-quarter growth in gross domestic product (GDP) was a robust 3.1 percent, the details of the report suggest much weaker prospective growth

The best way to take out recession or slowdown insurance would be for the Fed to cut interest rates by 50 basis points over the summer and by more, if necessary, in the fall.

Markets currently expect rate cuts, so failure to deliver would be a negative surprise; it would have direct adverse effects and raise questions about whether the Fed is adequately sensitive to economic conditions.

Allowing a recession with inadequate firepower to confront it risks “Japanification” — a situation where interest rates are permanently pinned at zero and deflationary pressures take hold.