- The Federal Reserve needs to pay more attention to the US deficit, Larry Summers said.
- He also told Bloomberg TV that the chances of a soft landing are 1-in-3.
The expansion of the US deficit needs to be a factored in by the Federal Reserve in its fight against inflation, former Treasury Secretary Larry Summers said Wednesday.
While he acknowledged that real rates may start appearing more restrictive as inflation falls, Summers cited hope that this doesn't encourage the central bank to signal lower rates.
Meanwhile, the federal deficit, which will likely hit $2 trillion at the end of this fiscal year, merits more attention.
"I think the argument that's underdone is the magnitude of the swing in the federal budget this year that we've had towards big expansion," he said.
"I think Chairman [Jerome] Powell was not nearly as concerned as he should have been about the scale of fiscal stimulus in 2021," Summers told $4. "And I'd rather see him expressing more concern about the fiscal situation that we're headed into."
He has $4 about the ballooning size of US deficits, noting that they are becoming increasingly unsustainable. With that, they also put upside pressure on inflation, and force the Fed to stay hawkish.
Summers also told Bloomberg that the odds of an economic soft landing are about one-in-three. Otherwise, a recession could still happen, or a "no landing" scenario where inflation stays above 3%.
As for equities, the former Treasury secretary warned that the chances of a "negative surprise" in markets outweigh those of a positive one.
"People need to be very careful about declaring victory — to be very careful about some assets, particularly in the stock market," he said. "It may be priced a bit for perfection."