Larry Summers says 'won't be prudent' for Fed to not hike

Lawrence Summers, Former Treasury Secretary of the United States and President Emeritus of Harvard University, today called for the Federal Reserve to up its interest rate for the first time in nine years, saying it would be prudent to do so."A strong predicate has been laid," he said, pointing to strong recent macro-economic data that has emerged out of the world's largest economy, where rates have stayed at near zero since it plumbed into a financial crisis in 2007-2008."Central banks have to act in consistent ways to preserve credibility. There have been very clear statements [from Fed officials] towards a rate increase this time," Summers, who was treasury secretary in 1999-2000 and director of President Obama's National Economic Council, said.Summers is in India for a visit and spoke to CNBC-TV18 exclusively.He also spoke about the slump in oil prices, and said it was the result of a combination of weak demand and strong supply."There are also many number of improvements in mining technology and new discoveries," he said. "So you put those things together, less demand and more supply and you are going to get a lower price and I think that is going to be expected to be with us for some time."Below is the transcript of Lawrence Summers’ interview with Latha Venkatesh on CNBC-TV18.Q: Actually, this week, we have seen some fairly debilitating falls in commodities. Crude, down about 6 percent and other commodities as well. Does it look like the newer mark that mines closing down, workers laid off, is this probably the last leg?A: It is hard to know. You have a combination of a global economy that looks like it is going to be softer, longer, than we would have thought several years reducing demand. And you also have substantial things going on, on the supply side to increase supply. Most obviously, shale oil in the United States, but the better number of improvements in mining technologies and new discoveries. So, you put those things together, less demand, more supply, and you are going to get a lower price. And that is going to be expected to be with us for some time. Is this the end? I am not sure that it is. I would be surprised if the average price of oil over the next 5-10 years is not above the price we are seeing today. But, whether this is the end, that is a judgement every investor will have to make for themselves.Q: But, actually, debt crisis that started with the United States moved on to Europe, towards the end of the last decade. And now, it has become a huge emerging market growth issue as well. Does it look therefore that 2016., the global economy grows even slower than 2015?A: I think the risks are much more on the side of excessively slow growth than they are on excessively rapid growth. The risks are more on the side of low flation and deflation than they are on the side of inflation in most countries. The challenge for most developing countries is going to be too little confidence in too much capital outflow, rather than too much confidence and too much capital inflow. So, it is all a matter of balancing risks, but I would be balancing the risk towards weakness on the supply side and insufficient demand, holding back the global economy.Q: Now, to come to the most proximate big event that the world is watching out for – the Federal Open Market Committee (FOMC) meeting. Do you think that there is no case to postpone the rate hike, that because it has been so much awaited, it will come?A: I think that so strong a predicate has been laid for a rate increase that it is hard to imagine that it would be prudent to not come forward with a rate increase given the predicate that has been laid. And so, I think that central bankers have to act in consistent ways to preserve credibility. And there has been very clear statements pointing towards a rate increase this time. And, that in a sense pre-judges the issue. I think the question of what the right trajectory is remains one that is very much open to debate. The question of whether a different predicate could have been laid is one that historians and people concerned with policy will look back and try to evaluate. But, I think it is pretty clear that given the predicate hat has been laid, there is really no viable alternative.Q: Actually, the dot chart indicates four rate hikes. The market is pencilling in three rate hikes if you looked at the Fed Funds futures. What is your own estimate of what the economy can take?A: I think it is much too early to judge that. It has to be judged as we go and I certainly would not presume to make a forecast at this point and indeed, there are many issues. Does a forecast represent the average of when things going to happen? Does the forecast represent the mode, that is the thing when things is most likely to happen? These are all issues and looking at the dots and comparing them with the futures and so forth.Q: I want to know whether you actually dwelt on Raghuram Rajan's domestic policy. We can boast of an inflation of between 5 and 5.5 percent and a fiscal deficit if you combine the Centre and the provinces, the states would still add up to about 7 percent. So do you think his emphasis on inflation first is right at the current juncture? A: I am not familiar enough of all the details of the Indian economy to comment on the details of the monetary policy. I do think India is fortunate to have Raghuram Rajan. I think he is a person who has recognized around the world as an extraordinary economic professional, a person who is remarkably thoughtful, who has been present in some very important respects and so I would have enormous respect for the monetary policy judgments he would make. Q: One more region I will have to ask your opinion on China, what is the sense you are getting that the country will be able to manage 6.5-7 percent growth that it will be successfully be able to transit from any infrastructure led investment led economy into a consumer led economy?A: I think China has got big challenges ahead of some of the financial distress they suffered earlier in the year maybe a kind of canary in a coal mine. I think moving from an economy that was so investment led to economy that is consumption led, that is heavy massive goods like steel to more service oriented economy from a more export oriented economy to a more domestic demand oriented economy. These are all substantial challenges and it will test the Chinese economic leadership to put it all off without any meaningful interruption in growth. But they have shown themselves as a cadre, as a group to be very strong at overcoming adversity over many years now.Q: Do you think their initiative to have almost a rival international monetary fund (IMF) in their Asian Bank will be a big threat to the IMF? At the moment it is a very small entity.A: That remains to be seen. My hope would be that in responding to any stabilisation crisis, if one should arise in the future, there would be corroboration between all institutions that have the capacity to provide funds. Q: But what about within the IMF itself? There seems to be a deadlock with the US not giving up is votes. How might the end game play?A: There have been issues where the US Congress has not given some necessary approvals, but I think those approvals will come perhaps, sometime soon. I would regard myself as guardedly optimistic. I think that it will be welcomed if it did happen.Q: A non-European IMF head is possible, you think, the next one after Christine Lagarde?A: Oh who know? We will have to see.Q: No, I mean are the powers shifting?A: Who knows? We will have to see.Q: Finally, let me end where I began. All I am asking is for the delta. Will 2016 delta-wise be higher than 2015 in terms of consumption and growth?A: I am not confident that it will. It may be. I would guess it would be another sluggish year and I am not confident which way it will work out in terms of above or below, but I do not think it will be vastly better. I would not be surprised if it was worse.