(Bloomberg) -- Former Treasury Secretary Lawrence Summers said Federal Reserve policy is leaning toward being too slack, emphasizing that the US economy's biggest risks lie in inflation rather than the job market.
"My own guess is that policy is currently a little looser — looking at all financial conditions — than people view it as being," Summers said on Bloomberg Television's Wall Street Week with David Westin. "The balance of risks is a bit more tilted towards inflation rather than unemployment."
Summers spoke after Fed policymakers cut their benchmark interest rate for the first time in a year. Jerome Powell, the central bank's chair, said the decision reflected a shift in the balance of risks, with "the much lower level of job creation and other evidence of softening in the labor market" apparent in data in recent weeks.
"The biggest risk in this situation is being that we lose contact with our 2% inflation target and become a country with an inflation psychology," said Summers, a Harvard University professor and paid contributor to Bloomberg TV.
"I think we're a bit on the loose side with respect to monetary policy and monetary policy signaling," Summers said. "But that's very much a difference of degree."
Fed governors and reserve bank presidents, in updated projections released Wednesday, boosted their inflation forecast for next year. The median estimate shows a 3% increase in the Fed's preferred gauge, the Personal Consumption Expenditures price measure, for 2025, and a 2.6% rise next year — higher than the 2.4% predicted in June.
"If I were sitting in Chair Powell's shoes, my greatest concern would be very much" on the inflation side, Summers said.
The pressure from President Donald Trump and his allies on the Fed to slash interest rates underscores the need to retain credibility on fighting inflation, the former Treasury chief added.
"I don't think they're doing it based on political pressure," Summers said of the Wednesday rate reduction. "But I think you have to bend over backwards at a moment like this. And I'm not sure they've bent over quite as far backwards as I would have liked to see."
Summers also criticized Trump's call this week for moving away from quarterly corporate earnings reports toward a slower tempo that would allow businesses more time for longer-term planning and investments. The president said moving to a six-month reporting schedule "will save money, and allow managers to focus on properly running their companies."
"It's a bad idea whose time should never come," Summers said. The US has the world's most successful capital markets, with price to earnings ratios systematically higher than in other countries "because of our whole regulatory framework, our reporting framework."
Investors "feel they can be confident" because of the transparency of the US system, Summers said. Companies are already able to raise money for long-term ideas, he also said. Firms without profits and in some cases without cash flows or even business plans are able to fund themselves, he noted.
The idea of "an honest, fair market was to try to reduce the advantage of insiders relative to outsiders," Summers said. "This goes in exactly the wrong direction."
(Updates with comments on corporate reporting in final four paragraphs.)
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