Former Treasury Secretary Larry Summers warned that the US economy could face a sudden downturn if the Federal Reserve fails to rein in inflation.[0] Speaking on NPR’s ‘Here & Now Anytime’ podcast Wednesday, the American economist and former president of Harvard University said consumer price pressures have eased and the economy is very strong, given a low unemployment rate.[1]
He stated that he believes the general agreement has become too comfortable with inflation for multiple explanations.[2] He remarked that, despite the recent relaxation, inflation is still higher than it was two years ago.[3] Making a football analogy ahead of the Super Bowl, the former Treasury Secretary said we are getting closer to the red zone with respect to inflation, where it is tough to navigate.
“It’s easier to move the ball down the field at midfield than it is when you’re in the red zone,” he said.[4] We are nearing the point of inflation referred to as the red zone.
He compared inflation to a half-way healed “infection” that could return, in a harder fight for the Fed if not properly treated.[1]
“We’ve all had the experience of taking a course of drugs and giving up, stopping the drugs before the course was exhausted but simply because we felt better,” he said.[5] “And then, whatever infection we had came back, and it was harder to fight the second time.”[6]
The jobs report released on Friday showed an impressive 517,000 jobs added in January and unemployment decreasing to an astonishing 3.4%, the lowest rate since 1969.[7] Economists had anticipated an addition of 185,000 jobs to the market, yet the Federal Reserve’s frequent rate hikes over the past year had caused a decrease in hiring.[7]
The Fed has raised rates by 450 basis points to bring inflation down to its 2% target.[1] Inflation has been moderating since mid-2022, with December’s reading coming in at 6.5%, the lowest level in over a year.[5] That’s boosted investor hopes that the Fed will temper what has been an aggressive monetary tightening campaign, raising the odds of a soft landing – cooling inflation without triggering a recession.[8]
Investors are still worried that the robust jobs data from January might revive inflationary pressures, even though they have been decreasing.[9] When the labour market is competitive, wage increases are often seen.[1]
0. “Summers Sees Risk of ‘Sudden Stop’ in Economy After Jobs Surge” Bloomberg, 3 Feb. 2023, https://www.bloomberg.com/news/articles/2023-02-03/summers-sees-risk-of-sudden-stop-in-economy-after-jobs-surge
1. “Inflation could return as a worse ‘infection’ if Fed mucks up: Summers” Markets Insider, 9 Feb. 2023, https://markets.businessinsider.com/news/stocks/inflation-could-return-worse-infection-if-fed-mucks-up-summers-2023-2
2. “Ahead of Tuesday’s CPI Data, Larry Summers Warns Further Inflation Reduction Will Be Harder: ‘We’re Getti” Benzinga, 11 Feb. 2023, https://www.benzinga.com/news/23/02/30867933/ahead-of-tuesdays-cpi-data-larry-summers-warns-further-inflation-reduction-will-be-harder-were-getti
3. “Larry Summers: ‘Big mistake’ to think US economy ‘out of the woods’” msnNOW, 6 Feb. 2023, https://www.msn.com/en-us/money/markets/larry-summers-big-mistake-to-think-us-economy-out-of-the-woods/ar-AA17aujQ
4. “Larry Summers warns now is not the time for investor ‘euphoria’—markets are headed for a ‘turbulent period’” Fortune, 13 Feb. 2023, https://fortune.com/2023/02/13/larry-summers-economy-interest-rates-fed-inflation-cpi-stock-market/
5. “Larry Summers says the economy could be headed towards a ‘Wile E. Coyote moment’” Fortune, 9 Feb. 2023, https://fortune.com/2023/02/09/larry-summers-economic-outlook-coulwiley-coyote-momeny-layoffs-recession-inflation/
6. “Economist Larry Summers compares the Fed’s inflation fight to taking a medicine for an ‘infection’—and says the ‘risks are very large’ that the economy tips into a recession” Fortune, 9 Feb. 2023, https://fortune.com/2023/02/09/larry-summers-compares-inflation-to-infection-big-risks-recession
7. “Larry Summers: More likely the Fed can pull off a soft landing, but don’t get hopes up” KTVZ, 5 Feb. 2023, https://ktvz.com/money/cnn-business-consumer/2023/02/05/larry-summers-more-likely-the-fed-can-pull-off-a-soft-landing-but-dont-get-hopes-up-2/
8. “Larry Summers: Soft landing is likely but US is still ‘not out of the woods’” Markets Insider, 6 Feb. 2023, https://markets.businessinsider.com/news/stocks/larry-summers-us-economy-soft-landing-inflation-fed-rate-hikes-2023-2
9. “Former Treasury Secretary Larry Summers compares falling inflation to a half-way healed ‘infection’ that could” Business Insider India, 9 Feb. 2023, https://www.businessinsider.in/stock-market/news/former-treasury-secretary-larry-summers-compares-falling-inflation-to-a-half-way-healed-infection-that-could-worsen-if-not-treated-properly/articleshow/97779896.cms