Larry Summers warns of an economic 'collision' ahead as the Fed's efforts to dim inflation aren't working as well as hoped
Zahra Tayeb @ Market Insider
- Larry Summers said the Federal Reserve's efforts to cool inflation via interest-rate hikes aren't doing the job.
- The Fed's been trying to put the brakes on, and it doesn't look like the brakes are getting much traction," he said.
- That could set the US economy up for a "collision or crash", the former Treasury Secretary said.
Former US Treasury Secretary Larry Summers has doubled down on his warning that the US economy is headed for a "collision", as the Federal Reserve's efforts to cool inflation aren't working as well as hoped.
The Harvard University economics professor was asked on a Bloomberg interview Friday whether the central bank needs to rethink its approach to taming the US inflation rate, which is still running far above its target.
"The Fed's been trying to put the brakes on, and it doesn't look like the brakes are getting much traction," Summers said.
Over the past year, the US central bank has increased interest rates at the fastest pace in history to try to bring inflation down to its 2% target. It hiked by 25 basis points earlier in February, taking the cumulative increase since last March to 450 basis points.
Though inflation has moderated from the 40-year high of 9.1% in June, it was still far above the Fed's target at 6.4% in January. It was just slight drop from December's reading, suggesting price pressures remain stubbornly high.
"When your brakes don't get much traction, two things happen. You can be moving too fast — that's the inflation pressure — and you can be setting yourself up for some kind of collision or crash down the road," Summers said, likely referring to a US recession.
"Both of those things, I think, are real risks in this environment," he added.
A hotter-than-expected retail sales report and strong US labor market data recently have sparked concern among investors that the Fed could keep raising interest rates longer than previously expected. But according to Summers, the Fed needs to tread cautiously.
"The risk is that we're going to hit the brakes very, very hard. And then when we hit the brakes very, very hard, that's going to kick in at the same time that some of those negative cyclical dynamics about rising savings and excess inventory and so forth are kicking in," he said.
"The danger is drop-off," he said.
