Recession ‘likeliest outcome’ for US economy, says Larry Summers

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,
2.829%
and 30-year rate TMUBMUSD30Y,
2.919%
reached their highest levels since 2018 and 2019, respectively, while major U.S. stock indices DJIA,
-0.33%

COMP,
-2.14%

SPX,
-1.21%
finished lower. Stock and bond markets were closed for the Good Friday holiday.

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