Bloomberg News

Summers Backs Yellen’s Debut in Fed Chair Role He Wanted

February 16, 2014

Fed Chairman Janet Yellen

Janet Yellen, chairman of the U.S. Federal Reserve, smiles while listening to opening statements prior to delivering her semi-annual report on monetary policy and the outlook for the U.S. economy to the House Financial Services Committee in Washington, D.C., on Feb. 11, 2014. Photographer: Drew Angerer/Bloomberg

Federal Reserve Chair Janet Yellen is generally taking the right approach in continuing efforts to boost a tepid U.S. economic recovery, former U.S. Treasury Secretary Lawrence Summers said in an interview airing today.

Summers, who had sought the post Yellen assumed on Feb. 3, said on “CNN’s Fareed Zakaria GPS” that inadequate demand and slow growth remain the greatest threats to the economy and that the Fed’s bias toward expansion is “broadly the appropriate orientation to have.”

Asked about any specific disagreements with the policy Yellen laid out in testimony last week to the House Financial Services Committee, Summers said, “It’s very hard to judge tactics from the outside,” according to a CNN transcript.

Summers was in the running last year to succeed then-Fed Chairman Ben S. Bernanke, whose eight-year tenure ended on Jan. 31. Summers withdrew his name from consideration in September, before Yellen was nominated by President Barack Obama.

Summers told CNN he that while he is less optimistic about the economy now than two months ago, he still sees growth of about 3 percent even after two “soft” employment reports. Payrolls expanded by 113,000 in January and 75,000 in December, the lowest in almost three years.

Lowered Consensus

“The statistics right now and the people who base their judgments on the statistics are actually a little more optimistic right now than the business folk I talk to,” he said. “The consensus has come down a bit” in recent weeks.

Economists surveyed by Bloomberg expect gross domestic product to expand at a 2.9 percent pace in 2014, faster than last year’s 1.9 percent growth rate.

“Around the consensus forecast of about 3 percent, the risks are pretty symmetric,” Summers told CNN.

Summers, who was treasury secretary under former President Bill Clinton, also said the U.S. “would be doing much better if more of the spur to economic growth was coming from the side of government spending or tax reduction rather than relying on the monetary and liquidity tools.”

“That, of course, is not within the power of the Federal Reserve,” he said.

Consistent Advocate

Summers has been a consistent advocate for fiscal stimulus. He and Brad DeLong, a University of California professor, said in a 2012 paper that short-term fiscal stimulus is effective medicine for a deep contraction and can pay for itself. If a central bank’s policy interest rate is stuck at zero for a long period, that could reduce the cost of fiscal policy and make it more effective.

Summers’s path to being nominated for the Fed post ran into trouble in the Senate Banking Committee last summer when several Democrats expressed concerns over his combative management style and close relationship with Wall Street.

At the time of his withdrawal, Summers said his nomination would lead to an “acrimonious” confirmation process that wouldn’t be in the interests of the economy or the government.

Summers, 59, was a key architect of Obama’s 2009 economic stimulus program. As director of the National Economic Council, he shaped the administration’s response to the biggest U.S. economic crisis since the Great Depression.

After being passed over for the Fed post when Obama nominated Bernanke for a second term in 2009, Summers had been favored to lead the central bank.

Purchases Reduced

The Fed said in December that it would start reducing the monthly pace of asset purchases, citing progress toward its goal of full employment. It announced a $10 billion reduction that month, followed by a cut of the same size in January, to $65 billion.

Yellen pledged during her Feb. 11 testimony to the House committee that she would maintain the thrust of Bernanke’s policies by scaling back stimulus in “measured steps,” signaling that the bar is high for a change in that plan.

U.S. industrial output unexpectedly declined in January by the most since May 2009, adding to evidence severe weather weighed on the economy. The 0.8 percent decrease at manufacturers followed a revised 0.3 percent gain the prior month that was weaker than initially reported, figures from the Fed showed last week.

Debt Ceiling

Summers, asked during the CNN interview about Congress’s willingness last week to raise the government’s debt ceiling with no strings attached, reiterated his view that the process requiring legislative approval should be abolished.

“I have college-aged children, and occasionally, we have a difference of opinion about how much money they’ve spent,” he said. “We discuss whether they’re going to pay or whether I’m going to pay, but we don’t discuss whether or not Visa should get stiffed, because we know that would be terrible for our family’s credit rating and that’s just not what we would do.”

“There is no productive purpose to it,” Summers said of the debt-ceiling debate.

Obama yesterday signed into law the measure that raises the debt ceiling into March 2015.

Summers is an economics professor at Harvard University. He previously served as the school’s president.


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