Rising interest rates have done little to tame inflation amid the current tight job market, creating conditions that are ripe for a recession, according to many economists.
The latest voice to join the chorus may well be the most important: former Treasury Secretary Larry Summers, who says that a recession within the next two years is “the most likely thing.”
In an interview with Bloomberg released on Thursday, Summers criticized the Federal Reserve’s focus on engineering a “soft landing” for the economy, instead offering a much more pessimistic prediction.
“If you look at history, there has never been a moment when inflation was above 4% and unemployment was below 5% when we did not have a recession within the next two years,” Summers said.
He added that the odds of a recession-inducing hard landing—a prolonged economic downturn that follows after a period of rapid growth—are “certainly better than half, and quite possibly two thirds or more.”
The former Secretary also said he does not think the Fed’s plan to lower inflation while managing a tight labor market with extremely low unemployment to be a “terribly plausible one.”
Summers says the Fed’s decision to postpone any action on inflation until prices began rising was misguided from the start. “Prudent policy makers don’t just pay attention to the current moment. They pay attention to what happens over the longer term,” he said.
In 2020, Federal Reserve Chair Jerome Powell announced an update to the body’s traditional policy towards inflation, signaling that inflation would be allowed to run higher than it usually would, in an effort to revive job growth and the battered early-pandemic labor market.
The Fed has since stuck closely to this new approach, not raising interest rates until March, shortly after February’s inflation numbers were released revealing that prices had jumped 7.9% higher than last year. More interest rate hikes are expected.
Banks and investors alike have warned that the steep interest rate hikes could lead to a severe economic downturn, and up to 40% of recently polled economists believe that a recession will hit within the next two years.
Before warning about possible recessions, Summers had been cautioning about inflation for months, one of the first U.S. economists to do so.
In an op-ed published in The Washington Post in Feb. 2021, he opined that President Joe Biden’s recently-passed $1.9 trillion COVID-rescue package could lead to a serious inflation problem if safeguards weren’t put in place.
In his interview with Bloomberg, Summers reiterated his stance on the Fed’s new policy, and demanded more accountability from the central bank.
“I think the Fed should be much more visibly acknowledging that it’s been wrong and seeking to understand and learn from its errors than have been the case,” he said.
