Former Treasury Secretary Larry Summers, whose conflicting views on the risks of prolonged inflation have come true, reiterates his concerns about a possible US downturn: He now says a recession is “the most likely”, partly because the Federal Reserve “must.” keep going [in its effort to subdue inflation] until we see disinflation.”
In an interview with Bloomberg Economics published Thursday, Summers, a paid Bloomberg contributor, said that “the odds of a hard landing within the next two years are certainly better than half and possibly two-thirds or more.” One of the mechanisms that will bring about a recession is the central bank’s response to increased inflation, Summers said, adding that “we won’t see disinflation back toward the target range until we see a significant rise in unemployment.”
See: Treasury Secretary Janet Yellen says it’s not impossible for the Fed to bring about a soft landing for the US economy
The release of Summers’ comments comes just two days after CPI data showed annual headline inflation in the US rose to 8.5% in March, the highest since 1981. The rate has been well above for almost a year the Fed’s 2% target, which puts central bankers under pressure to aggressively raise target interest rates. Expectations of higher interest rates are spreading across the economy, with the average 30-year mortgage rate rising to 5% for the first time in a decade. Meanwhile, financial market participants continue to debate whether inflation has peaked.
“If you look at history, there’s never been a moment where inflation was above 4% and unemployment was below 5% when we didn’t have a recession within the next two years,” Summers said, according to a transcript from Bloomberg. “I don’t think the idea that’s still in the Fed projections – that we could continue to have super-stretched labor markets with 3½% unemployment and we could have a rapid fall in inflation – is terribly plausible.”
In general, economists seem to recognize the potential for a downturn: an April Wall Street Journal poll of economists put the likelihood of a recession in the next 12 months at 28%, up from 13% a year ago.
On Thursday, investors sold Treasuries aggressively as they assessed the future path of inflation, with yields rising across the board. 10-year TMUBMUSD10Y, 2.827% jumped over 2.8%, while major US stock indexes DJIA, -0.33% COMP, -2.14% SPX, -1.21% were mixed.