Summers: Currency Intervention Doesn't Work

So Larry, besides the data, the wealth of data that came in on big topic in the news this week was the Japanese yen and what’s going on exactly the yen with the government there is intervening or not intervening to sort of support the yen when it went up to 160. Actually you have some experience with intervention and currencies. Give us where you think we are right now. And of course this is related to the Fed because part of the issue is if the Fed stays higher for longer, it supports the strength of the US dollar given the massive size of the capital markets. I think the evidence is reasonably clear that intervention doesn’t work even in the scales that the Japanese engaged in. It’s just overwhelmed by the broad magnitude of private sector capital flows. That said, nations tend to intervene when currencies have gotten very far from normal levels, and when they’ve gotten very far from normal levels, they sometimes bounce back. So I wouldn’t want to confidently presume that the yen will devalue further from here. It could go either way. But even if the end does have appreciate, I’m going to attribute that much more to snap back then I’m going to attribute it to the efficacy of intervention. But I think this points up an important issue which is that the dollar is extremely strong right now. That’s been a factor that’s contributed to our relatively favorable inflation performance. Indeed, it’s not just that the dollar is strong, but that the dollar is strengthening that imparts A disinflationary bias to the US economy. And this is another example of a failure of Fed speak and to some extent of the commentariat, everybody. Focuses on transitory negative factors that are elevating the inflation rate and nobody focuses on transitory factors that are flattering the inflation rate. And I think we may well have had some of that in currencies over the last while and I don’t think we can count on that to continue. And that’s one of the reasons why I think the Fed’s a little too serene in its inflation views.