Larry Summers, who served as Bill Clinton’s Treasury Secretary and Barack Obama’s National Economic Council advisor, has warned that a recession is coming and that it will not be a mild one.
Speaking during an interview with MSNBC on Thursday, Summers said that the Federal Reserve will have to face a recession in the end if inflation is to come down.
He was speaking a day after the Fed released its latest policy announcement on December 14.
The Fed revealed a slowdown in benchmark rate policy with an increase of 50 basis points, after four consecutive months of 75 basis point hikes.
The central bank also suggested further rate hikes into next year with no cuts in the fed funds rate until 2024.
“I think the market is expecting, and I think that the market is probably right that inflation will come down from its current levels,” Summers told MSNBC’s Andrea Mitchell.
“There is still a question of whether it will stay down and how much we have to do to make sure that it stays down, I think it’s still a question.
“And whether it can be brought down to stay down without a recession is a very large question,” he continued.
“My guess is that the Fed will, in the end, have to suffer through a recession if we are going to bring inflation down.”
The former Treasury Secretary said that after years of monetary easing and the trillions in stimulus dumped into the economy during the pandemic, high inflation was inevitable.
He said that the Fed, despite being late to respond to rising inflation, had done the right thing.
“Perhaps that was inevitable. Probably that was inevitable given all these stimulus that was provided to the economy in 2021, given that the Fed was late, and very importantly, given all of these supply shocks that the economy suffered,” Summers added.
“But whereas I had thought that the Fed was very much in the wrong place a year ago, way behind the curve in terms of responding to inflation.
“I think in very difficult circumstances, they are in the range of having done the right things and pointing towards doing the right things.”
He then gave a compliment to Fed Chairman Jerome Powell, whom he has been very critical in the past, saying, “he [Powell] showed that no one can know what is going to happen going forward.”
Summers is absolutely convinced that the U.S. economy will be in a recession but that the downturn will not be especially mild.
“There is no reason to think that it will be anything like what happened after COVID, or what happened after the financial crisis, or what happened when Paul Volcker had to slay inflation after a much longer period of high inflation at the end of the 1970s,” Summers concluded.
“Perhaps the unemployment rate will get in the range of 6 percent.”
However, Powell told a reporter on Wednesday, “I just don’t think anyone knows whether we’re going to have a recession or not.
“And if we do, whether it’s going to be a deep one or not.”
Wall Street lost ground on Friday, the last day of trading for the week, marking the second straight weekly loss.
The S&P 500 fell 1.1 percent, for its third straight drop.
The Dow Jones Industrial Average dropped 0.8 percent, while the Nasdaq Composite Index lost 1 percent.
Investors are worrying that the Fed and other central banks may be willing to bring on a recession to beat inflation.
It was hoped that the central bank would signal that it would ease its rate increases into 2023, but policymakers instead signaled otherwise.
November’s Consumer Price Index (CPI), released on December 13, showed signs that inflation had cooled, though at a high 7.1 percent annual pace.
On Friday, S&P Global reported an elevated recession risk, with business activity slowing more than expected this month as inflation added an additional cost burden on companies.
Although the report noted that businesses faced the sharpest drop in activity since May 2020, in the early stages of the pandemic, inflation at the same time had also been easing.
Powell said the Fed would need to see more progress regarding the path of inflation before it would think of cutting its benchmark interest rate.
“Historical experience cautions strongly against prematurely loosening policy,” Powell said.
“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2 percent in a sustained way.”
Meanwhile, U.S. retail sales last month saw their steepest declines in almost a year as consumers increasingly rein in their holiday spending due to inflation.
“In short, the survey data suggest that Fed rate hikes are having the desired effect on inflation, but that the economic cost is building and recession risks are consequently mounting,” said Chris Williamson, the chief business economist at S&P Global Market Intelligence.