Policymakers need to heed the message from global commodity and stock markets that “risks are substantially tilted to the downside,” former US Treasury Secretary Lawrence Summers said on Wednesday.
Given the weakness in prices and growth, it’ll be hard for the world to take in stride four interest-rate increases that forecasters are pencilling in from the Federal Reserve this year, Summers said in a Bloomberg TV interview.
“I would be surprised if the world economy could comfortably withstand four hikes, and I think that basically the markets agree with me,” he said, adding that’s why it’s important to prepare for a range of possibilities.
“Really, what Policymakers need to think about is, it is insurance against the more negative scenarios.”
Markets around the world have been thrown into turmoil so far this year, as concern mounts about China’s slower growth prospects and its central bank’s ability to manage a transition into a more service-driven economy. The slowdown in China is also expected to prolong a slump in commodities, with oil dipping below $30 a barrel for the first time in 12 years on Tuesday.
Fed policymakers’ latest median projections issued in December implied the central bank would raise the benchmark interest rate by one percentage point this year. The Fed boosted rates last month for the first time since 2006, and indicated further moves will be gradual.
Summers also said there is a “significant risk” that within the next two years, Fed policy will have to reverse. The world economy is “riding heavily” on the United States, which “is not without its own fragilities,” he said. The right posture is being ready, including increased fiscal spending, if things slow down in a meaningful way, he said.
Even as the labour market has been the strongest part of the world’s largest economy in recent months, wages have been slow to accelerate. Meanwhile the energy industry is being squeezed by plunging oil prices at the same time a strengthening dollar, which makes American-made goods less competitive in the global marketplace, has hurt manufacturers.
Bloomberg-The Washington Post Service
Published in Dawn, January 17th, 2016