Former Treasury Secretary Lawrence H. Summers believes the United States is facing a very complex set of macroeconomic challenges but said the current situation does not include low unemployment and is not as grave as the 2009 financial crisis or inflation during the 1970s.

“Curbing inflation comes first, but we can’t stop there,” he tweeted.

Interconnected Problems: Summers pointed out that what stands out is the number of serious, interconnected problems demanding attention. 

“First, an economy that even progressives such as @paulkrugman recognize as overheated is operating with a core inflation rate that is close to 7 percent and is not yet declining,” he tweeted.

There is also a consensus prediction of a recession beginning in 2023, he said, adding that the Federal Reserve simply cannot bring down inflation to 2% without unemployment rising above 4.4%.

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Summers also highlighted how the Fed had raised interest rates in a way markets would have thought unlikely only a year ago. Markets are reeling from the shock, with a possibility that normal trading could break down in the Treasury bond market, which if unchecked would have significant ramifications, he argued.

Summers also pointed out the global economy is challenged by rising U.S. interest rates and a dollar exchange rate at record levels against some key currencies, while the fallout from the war in Ukraine has also been devastating to many economies.

The U.S. Federal Reserve is set to announce its monetary policy on Wednesday and market participants have already started factoring in a relatively less aggressive central bank. The SPDR S&P 500 ETF Trust (NYSE: SPY) closed 0.71% lower on Monday while the Invesco NASDAQ 100 ETF (NASDAQ: QQQM) closed 1.15% lower.

Policy Response: Summers noted that each of these issues could be all-consuming in normal times and questioned how should policymakers respond to their combination. “The objective of policy should be clear, at least. What is most important is that the maximum number of Americans who want to work are able to work at as high an income as possible, now and in the future,” Summers said.

The Former Treasury Secretary believes it’s vital for the central bank not to sway at the current juncture. “Chair Powell has vowed to impose sufficiently restrictive monetary policy to return inflation to within range of 2% target. The more confident workers, businesses & markets are the Fed will follow through, the less painful the process,” he said.

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Photo courtesy: Brookings Institution on Flickr