Federal Reserve

Economy 'caught in a vicious cycle': Larry Summers

Business investment 'caught in vicious cycle': Larry Summers
Business investment 'caught in vicious cycle': Larry Summers

In the continued absence of inflationary pressures in the economy, the Federal Reserve should be in no rush to increase interest rates for the first time in nine years, former Clinton Treasury Secretary Larry Summers said Wednesday.

"Even looking out 10 years, markets are expecting little more than 1 percent inflation on the index the Fed uses for inflation," he said in a CNBC "Squawk Box" interview. "You should kick up interest rates, as has been true forever, when you have an inflation problem."

The Fed wants to see inflation increase to its 2 percent target.

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Central bankers meet next week, but few economists and market watchers expect a hike. If rates were to go up this year, as Fed Chair Janet Yellen has indicated provided the economy cooperates, the December gathering of policymakers is more likely.

But more and more, the futures market has been pricing in a Fed hike for next year, with increasing odds on March.

"In the face of a 'low-flation problem,' [there's] no reason to raise rates," Summers said, dismissing the argument that a preemptive hike would stimulate business investment, which he considers crucial to boosting the economy.

"Low interest rates, other things equal, they raise the present value of cash flows in the future. And they get people to take a longer term view," said Summers, who also was an economic advisor to President Barack Obama.

But to get that business investment, more demand is needed, Summers said. "The key is you got to have demand if you want companies to invest. Otherwise, they're investing in capacity they don't need."

That goes back to getting the overall economy to grow faster, he said.

"We're caught in a vicious cycle. Incomes are too low, therefore investments are too low. ... We need to get out of that cycle," he said. He called for smart tax reform and rules to discourage the kind of activism that strips cash out of companies.

Summers, currently professor and president emeritus at Harvard University, acknowledged that near-zero percent rates hurt savers. But he argued they help short-term borrowers, evidenced by record auto sales.