The Fed's inflation fight is paying off - but a recession, slump in stocks, and spike in unemployment may lie ahead, ex-Treasury chief Larry Summers says

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The Fed's inflation fight is paying off - but a recession, slump in stocks, and spike in unemployment may lie ahead, ex-Treasury chief Larry Summers says
Larry Summers.Hyungwon Kang/Reuters
  • The Federal Reserve's interest-rate hikes are starting to cool inflation, Larry Summers said.
  • Yet the US economy may still suffer a slump in consumer spending, stocks, and employment, he said.
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The Federal Reserve has caught up with the inflation threat, but the US economy could still suffer a sudden downturn that causes stocks to slump and unemployment to spike, Larry Summers has warned.

The former US Treasury chief praised the Fed for its efforts to combat rising prices, which have seen it hike interest rates from almost zero in March to over 4% today. Consumer price inflation slowed to 7.7% in October and then to 7.1% in November, after surging to a 40-year high of 9.1% in June.

"We are in better shape than I thought we were," Summers tweeted on Friday. "The Fed is broadly in the right place."

Though the US central bank's efforts are starting to pay off, policymakers will need some luck to navigate the challenging global backdrop, he told Bloomberg on Friday.

And while the next recession might come later than first thought, it could strike fast and hard when it does arrive, he said. "It does look like it's pushed back a bit in time," Summers said.

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The economist flagged three things that could hit US activity at the same time: consumers exhausting their pandemic savings, businesses laying off workers after holding onto them in case of labor shortages, and corporate earnings slumping — which could also drag down stocks.

"The economy could have a kind of Wile E. Coyote moment," he said, referring to the Looney Tunes character who runs off cliffs, realizes he's standing in midair, then drops like a stone.

"It could all of a sudden change very dramatically," Summers said, commenting on the currently strong US job market.

Summers previously served as the president of Harvard University and the director of the National Economic Council. He told MSNBC on Thursday that the Fed will probably have to weather a recession to crush inflation, and avoid worse downturns and greater economic instability in the future.

The veteran economist remains one of the most hawkish voices on inflation. He has warned that interest rates could peak above 6% for the first time in more than two decades, and cautioned the Fed that hesitation risks stagflation — a painful mix of declining economic growth, high inflation, and rising unemployment.

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