Former Treasury Secretary Larry Summers, whose non-consensus views on the risks of lingering inflation have come to fruition, reiterates his worries about a potential US slowdown: He now says a recession is “the likeliest thing “in part because the Federal Reserve “is going to have to continue [in its effort to subdue inflation] until we see disinflation.
In an interview with Bloomberg Economics published Thursday, Summers, a paid Bloomberg contributor, said “the odds of a hard landing in the next two years are definitely more than half, and most likely two-thirds or more.” One of the mechanisms that would drive a recession is the central bank’s response to high inflation, Summers said, adding that “we’re not going to see disinflation return to the target range until we see unemployment rise. in a significative way”.
The release of Summers’ comments came just two days after Consumer Price Index data showed the annual headline inflation rate in the United States jumped to 8.5% in March, the level the highest since 1981. The rate has remained well above the Fed’s 2% target for almost a year. , putting central bankers under pressure to aggressively raise target policy rates. Higher rate expectations are reverberating across the economy, with the average 30-year mortgage rate hitting 5% for the first time in a decade. Meanwhile, financial market participants continue to wonder if inflation has peaked.
“If you look at history, there’s never been a time when inflation was above 4% and unemployment below 5% when we didn’t have a recession in the next two years,” Summers said, according to a Bloomberg transcript. “I don’t think the idea that’s always embodied in Fed forecasts — that we could have super tight labor markets at 3½% unemployment and we could bring inflation down quickly — is terribly plausible. “
To see: Treasury Secretary Janet Yellen says it’s not impossible for the Fed to engineer a soft landing for the US economy
In general, economists appear to be approaching the possibility of a slowdown: A Wall Street Journal survey of economists in April put the odds of a recession over the next 12 months at 28%, down from 13% it a year ago.
Investors sold Treasuries aggressively on Thursday as they gauged the way forward on inflation, with yields rising across the board. The TMUBMUSD10Y at 10 years,
and 30-year rate TMUBMUSD30Y,
reached their highest levels since 2018 and 2019, respectively, while major U.S. stock indices DJIA,
finished lower. Stock and bond markets were closed for the Good Friday holiday.