Former Treasury Secretary Lawrence Summers said he sees no more than a 15% chance that “it’s all going to work out well” for the U.S. economy, with the probabilities much greater for either stubbornly high inflation or a slump in growth.
Asked on Bloomberg Television’s “Wall Street Week” with David Westin for his estimates on the balance of risks for the U.S.,Summers gave the following odds:
• 10% to 15% for the economy to work out well
• 50% to 55% for inflation to run for a while above 2%
• 30% to 35% for policy makers having to force the economy to “turn down more than we want” by tackling inflation
That’s a more pessimistic analysis than Summers offered earlier in the year, when he saw the risks split equally between runaway inflation, a recession and the economy doing fine.
“The odds have gotten bit more tilted to the bad outcomes and a bit more tilted to inflation than I thought,” said Summers, a Harvard University professor and paid contributor to Bloomberg. “I say that because the inflation rates are up, I say that because markets have become more vulnerable and I say that because the Fed’s further behind the curve than I thought it was.”
Federal Reserve policy makers this month laid out a plan to phase out their asset-purchase program, but remain patient when it comes to raising interest rates even as inflation runs well above their 2% target.
The U.S. consumer price index jumped last month by an annual 6.2%, the most in three decades—vindicating Summers’s repeated warnings that inflation would prove stronger and more long-lasting than the Fed was anticipating.
While the U.S. central bank last year overhauled its strategy to signal it would allow the economy to run hotter than traditionally so as to deepen and broaden gains in employment, Summers said it’s time to refocus on fighting inflation.
“What’s most important is that the policy have credibility as competent and able to respond to changing events,” said Summers. “That’s what we need now.”
He said Fed officials also needed to be “much more careful” than they had been in recent years when making pronouncements about the economy.