Summers to Fed: Pre-emptive inflation war is dangerous

While the Federal Reserve contemplates increasing interest rates, former Clinton Treasury Secretary Larry Summers said Thursday that policymakers should be more concerned about acting too early than acting too late.

"The greater risks are on the side of [economic] slowdown and stagnation, rather than on the side of overheating and inflation," he told CNBC's "Squawk Box" in an interview.

The central bank should use inflation as the yardstick on rates, Summers said, adding that hints of price increases may be starting to pop up, but it is nowhere near the pace of being worrisome.

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"Pre-emptive wars don't work, and pre-emptive wars on inflation would be a big mistake," he said, noting that inflation has been virtually nonexistent. The Fed wants to see the inflation rate increase to 2 percent before considering a rate hike for the first time in nearly a decade.

The minutes from the central bank's March meeting, released Wednesday, showed policymakers were divided over the timing of rate increases—torn between liftoff in June, September or even waiting until next year.

But since that meeting, the March employment report showed a meager 126,000 nonfarm payrolls added. Expectations had called for nearly double that pace of job growth.

Whether those labor numbers will push the back the timetable on rate hikes has emerged as a burning question on Wall Street.

But a number of Fed officials have recently been stressing that the exact timing of the first increase in borrowing costs is not as important as the path of tightening, which is expected to be rather shallow.

Addressing accusations that low Fed rates are akin to price controls, Summers said: "It's not price controls. Price controls are when you set a price, you don't allow that price to change. And then there's excess supply or excess demand. We don't have that. The bond market clears every day."

Closely followed market watcher Jim Grant, and others, have said the central bank is controlling and manipulating rates. The founder and editor of Grant's Interest Rate Observer told CNBC on Tuesday that he'd like to see the free market determine borrowing costs.

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The rate discussion aside, Summers said there are better ways to encourage investment than Fed policies now that the economy is no longer in crisis.

"When there's an insufficiency of investment, it is a safer bet to try to ramp up public investment [and] to try to take structural measures to spur private investment," he argued, citing as solutions increased spending on infrastructure, ending the ban on crude exports, and searching for domestic sources oil and natural gas.

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