The Federal Reserve is finally on the right path when it comes to fighting inflation, but it’s likely to result in a painful economic contraction, former Treasury Secretary Robert Rubin said on Thursday.
“I think most likely we will not have a soft landing, I agree with the chairman of the Fed on that,” Rubin said at an event in New York marking MarketWatch’s 25th anniversary.
Rubin, who served as a top White House economic adviser to President Bill Clinton before heading the Treasury Department from 1995 to 1999, said he was worried that an economic contraction or recession would hit the “least well off” hardest and lamented the lack of a stronger social safety net.
But the Fed, which had been behind the curve, has little choice but to pursue a path of aggressive monetary policy tightening in its effort to wring out inflation now or it will be forced to take even more draconian action in the future, he said.
“Paul Volcker once said something to me I’ve never forgotten,” Rubin said. “He said when inflation begins, it can take on a life of its own. And then you get into the psychology of inflation and expectations.”
Volcker is the late former Fed chair credited with halting the inflationary spiral of the 1970s and early 1980s with a sharp tightening of monetary policy that tipped the economy into a painful recession.
In the current inflation battle, the Fed was “behind the curve for a long time,” Rubin said, and inflation expectations began to build up leading to a serious problem. “It’s extremely important that the Fed continue on its current path” of aggressive tightening as opposed to its previous path, he said.
“ Paul Volcker once said something to me I’ve never forgotten. He said when inflation begins, it can take on a life of its own. And then you get into the psychology of inflation and expectations.”
Financial markets swung in volatile trade Thursday, with the Dow Jones Industrial Average DJIA, -1.34% erasing a plunge of nearly 550 points before rebounding to a gain of around 900 points in late trade, while the S&P 500 SPX, -2.37% erased a steep decline to rise 2.8%. The S&P 500 remains down nearly 23% after ending Wednesday at its lowest since November 2020.
The wild swings came after data showed that the year-over-year headline number for the September consumer-price index came in at 8.2%, down from 8.3%. But it was the rise in the core CPI number, which strips out volatile food and energy prices, that got the blame for the selloff, posting a monthly rise of 0.6% versus a Wall Street forecast of 0.4%. The increase in the core rate over the past year climbed to a new peak of 6.6% from 6.3%, marking the biggest gain in 40 years.
See: Consumer prices jump again in September and CPI shows little letup in high inflation
Rubin said that he had initially favored quantitative easing when rolled out by the Federal Reserve amid the 2007-2009 financial crisis, but became less enchanted with the program of buying government bonds in an effort to lower long-term interest rates and spark economic growth as it went through more iterations.
Rubin, who had served as co-chairman of Goldman Sachs GS, -2.31% before joining the Clinton administration, spent much of his tenure dealing with a rising China.
Rubin said that four or five years ago, most investors were bullish on China while he had a more skeptical view. “They’ve made a lot of bad decisions” and face other problems as they move away from a market-based economy, he said.
Strained U.S.-China relations are belied by common interests in areas like climate change, nuclear proliferation and global health, he said. Unfortunately, neither country is acting on that common interest and a more hostile relationship is developing, he said.
“We should be trying to find ways to work together in areas of common interest and then recognizing there are serious differences,” he said, with the U.S. also looking to protect itself “if even after you try to work with China, they refuse to work with us.”
Rubin said the U.S. continues to enjoy “enormous long-term economic strengths” but was worried about the ability of the political system to address policy needs.
“Will our elected officials be willing to work across party and policy lines? Because otherwise our system can’t work,” he said.
Rubin said he’s also worried that people who denied the outcome of the 2020 election are running for state-level positions that would give them the ability to affect the running of elections in 2024 and possibly disrupt the electoral process.