The US economy could face a “Wile E. Coyote moment” as the Federal Reserve struggles to bring down persistent inflation, according to ex-Treasury Secretary Larry Summers.
Summers, who has accurately predicted the path of inflation over the last year, warned that the Fed will likely have to raise interest rates higher than the market expects.
Further hikes could topple the US economy into a recession as embattled consumers cut back on spending, he added.
“I’ve used the term ‘risk of a Wile E. Coyote moment’ to refer to the fact that the economy could hit an air pocket in a few months,” Summers said during a Monday appearance on “CNN This Morning.”
“My guess is that the overhang, the savings that consumers have accumulated has a few more months to run, but it doesn’t have another year to run,” Summers added.
Inflation swelled 6.4% year-over-year in January, higher than economists had projected. Prices are still running well above the Fed’s 2% target for inflation.
Summers predicted the Fed’s benchmark interest rate will hit 5.5% to 6%. That would indicate multiple interest rate hikes in the near future.
“I don’t think there’s any question that we do not yet have inflation on a secure glide path anywhere near down to the 2% level,” Summers said. “Until the Fed can be confident of that, it’s going to be tightening rather than easing.”
“My guess is that the process of bringing down inflation will bring on a recession at some stage, as it almost always has in the past,” he added.
Summers’ remarks echoed a similar warning from San Francisco Fed President Mary Daly, who said Saturday that she sees more interest rate hikes on the way,
“It’s clear there is more work to do,” Daly said. “In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.”
Fed Chair Jerome Powell has also signaled that rate hates will continue will inflation is showing clear signs of decline.
The rate-making Federal Open Market Committee to announce its latest policy move after a two-day meeting that ends on March 22.
Investors are pricing in a 70.8% probability that the Fed will implement a quarter percentage point hike and a 29.2% probability of a larger half-point hike.
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