Former Treasury Secretary Larry Summers warned on Thursday that the US economy could slide into a recession as the Federal Reserve takes what he described as long-delayed measures to calm inflation, the highest in nearly four decades.
Summers, in an interview on a Bloomberg Economics podcast, said the US central bank has been slow to spot the dangers of inflation, and the steps it is now taking to mitigate the price spike may toss the economy into the doldrums.
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“If I thought we could run the economy in a sustainable way, that would be a wonderful thing, but the consequence – and this is the atrocious lesson we learned in the 1970s – of an overheating economy is no longer not just high inflation, but constantly rising inflation, ”Summers said. “That is why my fear is that we are already reaching a point where it will be difficult to reduce inflation without causing a recession.”
Summers, a Harvard University professor who served in both the Clinton and Obama administrations, has repeatedly sounded the alarm bells about rising inflation and spent much of 2021 arguing that the Biden team, as well as Fed policymakers, underestimated the risk of consumer price spikes. .
He warned that postponing the fight against inflation will only require tougher measures in the future that could jeopardize the recovery of the economy after the pandemic.
“We have a pretty serious inflationary situation,” Summers said.
Soaring inflation that showed no sign of slowing down forced the central bank and the White House to move closer to Summers’ position. The government announced earlier this month that prices jumped 6.8% in November from a year earlier, the fastest pace since June 1982, when inflation hit 6.1%.
A separate report released Thursday morning showed the Fed’s preferred inflation indicator also peaked in 39 years last month, hitting 5.7% – well above the central bank’s preferred target by 2%.
Last week, the Fed took a hawkish turn, announcing it would speed up its withdrawal of support from the economy in order to cope with rising prices.
The Federal Open Market Committee said after its two-day policy-making meeting that it would double the reduction of its asset purchase program to $ 30 billion per month, a schedule that could eliminate gradually purchases by March rather than the original June trajectory set last month.
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Although policymakers have voted to keep rates close to zero, where they have sat since March 2020, new economic projections show that a majority of Fed officials have forecast three rate hikes next year.
Officials now predict that rates will stand at 0.9% by the end of 2022, 1.6% by the end of 2023 and 2.1% by the end of 2024.