NEW YORK: Former Treasury Secretary Larry Summers on Thursday said the US economy could be headed for recession as the Federal Reserve has been restrained in cooling the hottest inflation in nearly four decades.
US consumer prices rose 5.7% over the past year, the fastest pace in 39 years, as a surge in inflation confronted Americans during the holiday shopping season.
Summers, during an interview on a Bloomberg Economics podcast, said the Federal Reserve has been slow to see the dangers of inflation.
“If I thought we could sustainably run the economy in a red-hot way, that would be a wonderful thing, but — and this is the excruciating lesson we learned in the 1970s — the consequence of an overheating economy is not merely elevated inflation, but constantly rising inflation,” Summers said. “That’s why my fear is, that we are already reaching a point where it will be challenging to reduce inflation without giving rise to recession.”
It would be a good thing to raise the minimum wage and empower unions, but “this kind of policy, there are no examples of successful inflationary policy that has worked out to the benefit of workers,” said Summers, claiming “dozens of examples” from the US, United Kingdom, and South America “where [the policy] backfired with respect to the very people it was trying to help.”
Summers, who served in both the Clinton and Obama administrations, has spent much of this year arguing that President Joe Biden’s administration and the Fed have underestimated the risk of soaring consumer prices. He has said that putting off tackling inflation will require more severe action in the future.
“We’ve got a fairly serious inflationary situation,” Summers said.
The Fed last week signaled it might need to raise rates in three 0.25 percentage point steps this current fiscal year in response to inflation running at multidecade highs and well above the central bank’s 2% target. Officials projected rates to stand at 0.9% at the end of 2022, 1.6% at the end of 2023 and 2.1% at the end of 2024.
The November inflation increase, reported by the Commerce Department, followed a 5.1% rise for the 12 months ending in October, and kept up a trend of annual price gains running well above the 2% inflation target set by the Federal Reserve.
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