Fed minutes hint at discussion of tapering, Summers accuses Fed of creating "complacency" on inflation

On Wednesday afternoon, Eastern Time, the Federal Reserve released the minutes of its April monetary policy meeting. Some Fed officials hope to discuss reducing the Fed's massive bond-buying program at future meetings. U.S. stocks extended their losses after the minutes were released.

Former U.S. Treasury Secretary Lawrence Summers believes that the Federal Reserve may be forced to tighten monetary policy reflexively, which will spook the market and even damage the real economy.

Summers harshly criticized the Federal Reserve's loose monetary policy, accusing the central bank of creating a "dangerous complacency" in financial markets and misjudging the economic situation.

Summers' comments, made at a conference hosted by the Federal Reserve Bank of Atlanta, marked a clear escalation in his criticism of the Fed. The Harvard economist, who has served as a top presidential adviser in Democratic administrations, criticized President Biden's fiscal stimulus plan as too aggressive earlier this year.

Summers said monetary and fiscal policymakers had “significantly underestimated the risks posed by a prolonged period of very low interest rates to financial stability and conventional inflation.”

The Fed has vowed to keep U.S. interest rates near zero until the economic recovery reaches certain milestones, including full employment, and predicts that the surge in inflation is temporary. The median forecast of Fed officials in their latest forecasts shows that extremely low interest rates will remain until at least 2024.

“Policy forecasts that interest rates may not rise for nearly three years are creating a dangerous complacency,” Summers said.

Several Fed officials said this week that the central bank is watching economic developments closely and would be ready to adjust policy if necessary.

“If we feel like we’re essentially past this and it’s not going to come back in some surprising way, then we can talk about adjusting monetary policy,” St. Louis Federal Reserve Bank President James Bullard told reporters after a speech on Wednesday. “I don’t think we’re there yet, but it certainly looks like we’re getting close.”

Atlanta Fed President Raphael Bostic made similar remarks in an interview on Bloomberg TV.

“We have to be very flexible in terms of how we monitor and respond to the economy,” Bostic said on Wednesday.

Long-term bond yields jumped and stocks extended losses after the minutes were released. The 10-year Treasury yield rose as high as 1.692%, up from 1.62% early Wednesday.