Harvard economist Larry Summers has said for months that if the Federal Reserve pushes interest rates high enough to control inflation, there’s a good chance it will cause recession.
“I would be very surprised if we saw inflation come down to 2.5% without also having seen a recession,” he told Bloomberg June 17.
Fed officials have a median forecast of 2.6% for the personal consumption expenditures price index in 2023. That index soared 6.3% in the 12 months through April.
Summers thinks it’s unlikely that a recession will be enough to bring inflation “all the way down [to 2.5%] -- that’s why I think the central tendency is toward stagflation.”
On the employment front, Fed officials foresee a jobless rate of 3.9% next year, little changed from the May total of 3.6%.
Summers isn’t buying it. “A better judgment is that there’s no reduction to normality without a significant increase in unemployment of perhaps 2 percentage points or more at some point down the road,” he told Bloomberg. That would put the jobless rate at least at 5.6%.
Summers Lauds June 15 Move
As for the central bank’s 0.75-percentage-point rate hike June 15, “the Fed is showing determination,” Summers told Barron’s.
“I understand the decision to do a 0.75-percentage-point move as a significant policy step. But I still don’t believe that the Fed has realistic projections.”
In particular, “why should anyone think that inflation is going to come down from the 8% range to the 2% range without unemployment rising above the Fed’s estimate of its normal rate, an estimate that is itself too low?” Summers asked.
The consumer price index surged 8.6% in the 12 months through May.
“My guess is that you will see further increases in projected inflation, projected unemployment, and projected interest rates,” he said.
Summers has noted for months that at no time in the past 65 years has inflation stood above 4%, unemployment stood below 5%, and the economy failed to enter recession within the next two years.
Wells Fargo Anticipates Recession
Others, too, view a recession as likely. Wells Fargo Chief Economist Jay Bryson is one of them. “We are changing our base-case forecast for next year from an economic soft landing to a mild recession starting in mid-2023,” he wrote in a commentary.
“Recent data suggest that inflation is becoming increasingly entrenched in the economy. High inflation is eroding real income, which likely will weigh on consumer spending growth in coming quarters.”
Real personal disposable income was flat in April from March.
“Additionally, the Federal Reserve is becoming increasingly hawkish,” Bryson said. The central bank already has raised its federal funds rate target by 1.5 percentage points since March, and he expects another 2.75 percentage points by early 2023.
