Former Treasury Secretary Lawrence H. Summers believes it will take a long time to get inflation down to where the Federal Reserve wants it to be and that it would be a little more sustained than expected.
“The labor market is strong and we are still in unprecedented territory in terms of the gap between vacancies and jobs. What that tells you is that we have a long way to go to get inflation down to where the Fed has said it wants it to be,” Summers said in an interview with Bloomberg Television.
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The former Treasury Secretary provided an airport analogy to explain how economic forecasts tend to behave.
“Every time they have revised their forecast of inflation up, they have revised their forecast of ultimate unemployment up as well. Gosh, we have all been at the airport. They say it’s leaving at 7:30. Then they say it’s leaving at 8:30 and then they say it’s leaving at 9:30," said Summers.
"And when I see that happen, I think it’s leaving at 11. It’s something like that with these economic forecasts. So, I hope I am wrong. But my sense is that inflation is going to be a little more sustained than what people are looking for."
Last week, major Wall Street indices registered losses as the central bank projected rate hikes through next year with no cuts until 2024. Fears of recession following a drop in retail sales also took their toll. The SPDR S&P 500 ETF Trust SPY lost over 2% in the last five days while the Vanguard Total Bond Market Index Fund ETF BND gained 0.31%.
Unemployment: Summers explained how negative situations tend to have an accentuated effect. “There is this proposition — it's called Sahm's Rule. It says when the unemployment rate goes up by half a percent, it goes up by more than 2%. That's because once you get into a negative situation, there is an avalanche aspect. I think we have a real risk that that's going to happen at some point,” he said.
He said that it's much harder to achieve a soft landing than many people think. “It will be great if Fed turns out to be highly skillful. But frankly, with everything going on in the world, this is a case where, as Lincoln said, we really want luck in our generals and luck in our leaders because this could go a lot of different ways."
Photo by Brookings Institution on Flickr
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