Saturday, June 22, 2024

Top Economist Larry Summers says inflation could make the Fed pump the brakes even harder—but there’s a risk the economy ‘hits a sudden stop’

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Former Treasury Secretary Lawrence Summers said that a broadening in US price pressures shows that the Federal Reserve’s monetary tightening to date is having a limited impact, raising the danger of policymakers having to do more than previously envisioned.

“The Fed’s been trying to put the brakes on, and it doesn’t look like the brakes are getting much traction,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “The risk is that we’re going to hit the brakes very, very hard.”Play Video

At the same time, Summers said it’s too soon to advocate for the Fed to re-accelerate its rate hikes to a 50 basis-point move at the March policy meeting. He flagged that there’s still a possibility the economy hits a sudden stop, when companies reckon with a build-up of inventories and headcount on their payrolls, and consumers deplete their savings.

“The Fed is going to have to view the situation with a lot of humility,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. It should “avoid locking itself in with any kind of strong pronouncements.”

Summers spoke days after the January consumer price index report showed a pickup in price pressures, with the headline gauge rising 0.5% from the month before, the most since October. The January jobs report also showed a surge in employment, leaving the number of job seekers still far below the number of available positions.

‘Real Concern’

The median component of consumer prices is now climbing at a pace “close to 7%,” Summers calculated — the fastest in four decades. “That has got to cause real concern about inflation.”

The data raise doubts about the consensus in financial markets that the main issue now is about how many more 25 basis-point hikes the Fed will execute before a “long pause” in rates and an eventual move toward easing, Summers said.

Instead, chances are the Fed will take longer to get to its peak policy rate — or that it will need to pick up the pace of hikes — he said. Interest-rate futures suggest Chair Jerome Powell and his colleagues will hoist the key rate by a quarter percentage point in March and May, and odds favoring a final quarter-point move in June. 

“It raises the possibility that we’re not landing at a terminal rate sometime in the next several months — or that we’re going to have to go back to hitting the brakes harder by more than 25 basis points,” Summers said.

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