‘Beware of false dawns’: Former Treasury Secretary Larry Summers warns recession is still ‘highly likely’
Former Treasury Secretary Larry Summers worries that investors and economists are becoming overly optimistic following year-over-year inflation cooling to 6.5% in December.
“One has to be careful with false dawns. If you think about it, the good news is that inflation is at 6, and that’s still unthinkably high by the standards of two or three years ago,” he said. told Bloomberg on Friday, adding that his forecast remains “high probability of a recession this year.”
Since March, Federal Reserve officials have raised interest rates seven times in hopes of curbing inflation without triggering a recession, and during that time, economists and analysts alike Wall Street debated whether they would succeed. Summers has repeatedly fallen into the camp of the bears. In October, he told Financial Times that it would take “a recession” and “unemployment heading into the 6% range” to ensure that U.S. inflation actually went away.
But the economist acknowledged on Friday that the latest inflation report was “good news”—and it came despite the unemployment rate being just 3.5% in December. He argued it was proof of that. shows that wages aren’t rising so dramatically, which means the Fed may soon change tack.
“Certainly, looking at some of these trends, one has to think that the Fed’s job is a lot closer to being done,” he said. “And I think the possibilities are more optimistic [for the economy]although I haven’t placed my bets yet, they seem more sensible today than they did a few months ago.
But while acknowledging that recent inflation data is “good news,” Summers argued that the Fed should continue to raise rates in February because wage pressures have not yet completely disappeared. Actual average hourly earningscausing inflation, which rose 0.4 percent last month, up slightly from November’s 0.3 percent gain and October’s 0.1 percent decline.
“I think the most important thing is that the job of curbing inflation is done and they keep their credibility,” he said of the Fed. “So I think it’s a little early to think about pausing at this point, but we’re getting closer to that date.”
in one September interview with Asset‘s Shawn Tully, Summers explains that a Fed rate hike is like an antibiotic to the economy—and if we don’t take it long enough, inflation could become a long-term problem.
“Most of us have learned that [when] the doctor prescribes you a course of antibiotics and you stop that course when you feel better, not when the course is over, your illness may come back,” he said. “And it might be harder to kill next time because the bacteria have become more resistant.”
On Friday, Summers pointed out Employment cost index (ECI)—measures the average cost per hour worked in the United States and is due out Jan. 31—is the real test of the Fed and the economy. He calls the index “the gold standard measure of labor costs and wage pressures.”
The economist has said for months that central bank officials must slow the labor market and rein in wage increases to keep inflation in check, even telling reporters in June that it could take “5 years unemployment rate above 5%”, according to Bloomberg. And he believes the ECI will be the perfect test of whether a rate hike is starting to do the job.
But other Wall Street leaders, including David Kelly, chief global strategist at JP Morgan Asset Management, believe the Fed has done enough to contain inflation. Kelly said Friday that the central bank is likely to raise rates by another 75 basis points between now and May, but he expects it to decide not to do so.
“I think they need to stop,” he told Bloomberg. “This is a war they won, and they risk pushing the economy into recession. I think they are making the financial problem worse, so I wish they would get it resolved.”
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