Ex-Treasury chief Larry Summers warns the Fed may need to hike rates above 5% to defeat inflation - and sees unemployment spiking to 6%

Ex-Treasury chief Larry Summers warns the Fed may need to hike rates above 5% to defeat inflation - and sees unemployment spiking to 6%
Larry Summers.REUTERS/Ruben Sprich
  • Larry Summers warned the Fed may have to hike interest rates above 5% to beat back inflation.
  • He predicted the cost would be a severe recession, and unemployment surging to about 6%.

The Federal Reserve may have to hike interest rates by more than it expects to conquer inflation, and the cost could be a painful spike in unemployment, Larry Summers has warned.

"We are unlikely to achieve inflation stability without a recession of a magnitude that would take unemployment towards the 6% range," he told the Financial Times. US unemployment last touched that level in April 2021, and has stayed below 4% since February.

The former Treasury secretary reiterated his view that rates could exceed 5% next year — above the Fed's expected range of 3.9% to 4.9%. He cautioned that many Fed watchers are underestimating the economic fallout from rate increases of that scale.

Moreover, Summers warned that if the Fed eases up in its inflation fight, that would be a "prescription for much higher interest rates and a sustained and very difficult stagflation that would have serious global consequences."

Summers, an economics professor at Harvard University and the former director of the National Economic Council, also set his sights across the pond. He slammed British leaders for inadvertently tanking the pound, sending UK government bond yields skyward, roiling the nation's pensions industry, and prompting an emergency Bank of England intervention in late September.


"I think there's an element of perfect storm in it," he said. "You had misguided fiscal policy coupled with lack of central bank credibility coupled with toxic leverage creating positive feedback loops that led cumulatively to a disastrous outcome."

The veteran economist asserted that the Bank of England tarnished its reputation during the fiasco, and that could weaken investors' confidence that other central banks can keep markets stable.

Summers also underscored the raft of challenges facing the world at the moment. He pointed to widespread inflation, tightening monetary policies, mounting concerns about China's policies and economy, Russia's ongoing invasion of Ukraine, and the shock to energy markets this year.

"I can remember previous moments of equal or even greater gravity for the world economy, but I cannot remember moments when there were as many separate aspects and as many cross-currents as there are right now," Summers said.

"It is difficult to be optimistic about the global prospect," he added, citing the risks of economic downturns in the US and China, and the European economy being "hobbled" by high energy prices.


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