The Fed could pull off a soft landing but the US economy “isn’t out of the woods”, Larry Summers said.
Investors are debating the possibility of a “soft landing” after a series of aggressive Fed rate hikes.
Inflation is still too high and a strong January jobs report could make it difficult to ease monetary policy, the Nobel Prize-winning economist said.
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Former Treasury Secretary Larry Summers says he’s encouraged about the prospect of the Federal Reserve pulling off a soft landing but warned the US economy is still not “out of the woods.”
In a Sunday interview with CNN’s Fareed Zakaria, Summers said “it looks more possible that we’ll have a soft landing than it did a few months ago,” while adding that he has a continued fear of inflation. “I’m encouraged but it’s a big mistake to think we’re out of the woods,” he added.
“We had a set of inflation indicators during 2022 that were very strong and have now come back to earth but are still too high and getting the rest of way back to target inflation may still prove quite difficult,” Summers said.
Inflation has been moderating since mid-2022, with December’s reading coming in at 6.5%, the lowest level in over a year. That’s boosted investor hopes that the Fed will temper what has been an aggressive monetary tightening campaign, raising the odds of a soft landing – cooling inflation without triggering a recession.
The central bank has boosted benchmark rates by 450 basis points since last March to ease consumer price pressures. However, it has already slowed the pace of its rate increases – with the latest move delivering a 25-basis-point hike, the smallest since last March.
But for Summers, it’s not all happy news for the US economy. His comments follow a strong jobs report that saw the US add 517,000 jobs last month, more than double the 188,000 expected by analysts. Meanwhile, the unemployment rate fell to 3.4% – the lowest level in 54 years.
Such a robust labor market could stand in the way of Fed Chairman Jerome Powell’s efforts to lower inflation down to his 2% target, as a tight jobs market often leads to higher wage gains.
Summers previously warned that a US recession was more likely than not because job losses were necessary to quell inflation. The former president of Harvard University recently warned the US economy could see a “sudden stop” later this year, despite January’s strong jobs report.