Former Treasury Secretary Lawrence Summers has warned that the US economy could see a “sudden stop” later this year, despite a strong January jobs report. He also cautioned that getting inflation back to the Fed's 2% target may still prove to be quite difficult, and it would be a “big mistake” to assume the economy is “out of the woods”.
Summers' warning comes after Friday's job's report showed an astonishing 517,000 jobs added in January and unemployment tick down to 3.4%, the lowest since 1969. The Federal Reserve had been raising interest rates aggressively for almost a year, and economists had forecasted that the job market would be slower, predicting a total of 185,000 jobs.
December's inflation rate of 6.5% was the lowest in more than a year, and inflation has been decreasing since mid-2022. Investors have been encouraged by the possibility that the Fed will reduce the degree of their rigorous monetary tightening, increasing the likelihood of a soft landing – inflation decreasing without causing a recession.
The former president of Harvard University, however, compared inflation to a half-way healed “infection” that could worsen if not treated properly, suggesting that getting inflation back to the desired level could be a difficult task.
Against that backdrop, Summers suggests the US central bank will need to navigate its fight against inflation delicately, noting that the Fed doesn't have an easy job ahead of it. He further warned that the US economy will experience a slowdown as the Fed maintains its tight monetary policy, adding that the odds of a recession in the next year are “more likely than not”.
0. “Larry Summers said the Fed could pull off a soft landing but warned the US economy is still not ‘out of the woods'” Business Insider Africa, 6 Feb. 2023, https://africa.businessinsider.com/markets/larry-summers-said-the-fed-could-pull-off-a-soft-landing-but-warned-the-us-economy-is/j393fc6
1. “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
2. “Larry Summers: More likely the Fed can pull off a soft landing, but don't get hopes up” News8000.com – WKBT, 5 Feb. 2023, https://www.news8000.com/lifestyle/money/larry-summers-more-likely-the-fed-can-pull-off-a-soft-landing-but-dont-get/article_a6a7483b-fa1c-590a-bd93-9f848ce4f6c3.html
3. “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