The intense debate over the fate of the U.S. Economy continues. Will the Fed’s aggressive interest rate hikes trigger a “hard landing” and a recession? Or is there still a chance that the Fed can bring down inflation without bringing down the economy?
Former Treasury Secretary Larry Summers seems to believe a hard landing is likely.
“I think a hard landing is substantially more likely than a soft landing,” he told the Wall Street Journal. “I think if inflation is going to come down in two or three years rather than the 10…that’s likely to be in the context of a recession not in the context of a smooth path.”
Summers was responding to a question about a recent Bank of America analysis that found in cases where inflation in developed economies rose above 5% between the 1980s to the 2000s, it took on average 10 years to bring it down to the Fed’s current target of 2%.
He added that the Fed’s current expectations seemed a little too rosy.
“I think the likelihood is that the current Fed forecast, which is that both unemployment will peak at 4.5% and that we will get back to 2% inflation within two and a half years—I think the odds that both those things are going to happen together are probably less than one in four,” Summers added.
The Fed raised interest rates by 75 basis points for the third consecutive time last week in its attempt to slow down the overheated economy and bring down inflation. Year-over-year inflation rose 8.3% in August, down from July’s reading of 8.5% and June’s reading of 9.1%. But the drop was less than expected and last month, Fed chair Jerome Powell warned that Americans would feel “pain” as the Fed tries to lower inflation.
Summer’s comments this week that a hard landing would be hard to avoid echoed similar ideas he shared with Coins2Day in an interview earlier this month.
“History teaches us that soft landings represent the triumph of hope over experience,” he said. “There are no examples when inflation was above 4% and unemployment was below 4% that the economy achieved a soft landing. We are unlikely to achieve a reduction of inflation to something like the Fed’s target without a significant slowing of the economy.”
As inflation has remained stubborn, a host of other economists have recently spoken more frankly about the risk of a recession. Economist Mohamed El-Erian recently told Coins2Day that the chance of a soft landing has become “uncomfortably low.” And Diane Swonk, KPMG’s chief economist, has said that she thinks the Fed has given up on a soft landing. In a note earlier this week, UBS economists said “the risk of a hard landing is rising.”
Summers, who’s been a vocal critic of the Fed, said it took too long for the institution to react to rising inflation.
“The Fed allowed itself to get way behind the curve for a long time in 2021 and early ’22, and in the process, sacrificed a reasonable amount of credibility,” he said.
When asked what he would do if he were on Fed to determine when to stop raising rates, Summers told the Journal that he’d watch what’s happening in the labor market.
“I’d be looking for evidence that signs of an overwhelmingly tight labor market were giving way to signs of a labor market with more slack,” he said.
Despite his earlier criticism of the Fed, Summers says the Fed is doing what it needs to.
“I think the best thing the United States can do for the global economy is to properly manage our own global economy. And as I’ve said, I think the Fed is moving in that direction,” Summers said.
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