The U.S. economy is facing some tough times ahead, and the Federal Reserve is standing on a double-edged sword, warns former Treasury Secretary Lawrence Summers.
What Happened: The possibility of a recession is growing based on a range of weak economic indicators, Summer said in a Friday interview with Bloomberg. The Fed has almost reached the end of its interest rate hike cycle and has some difficult decisions to make, including a rethinking of how savings are intermediated into lending, he said.
The former treasury secretary disregarded the March jobs report, saying it reflects the strength of the economy earlier in the quarter but is now less relevant due to the expected tightening of credit.
Read also: 'Fed's Job Isn't Finished': 4 Experts React To Jobs Report, Predict FOMC's Next Move
The recently issued and weaker-than-expected purchasing manager surveys for manufacturing and services indicate a larger slowdown than anticipated, Bloomberg noted. The ISM's factory gauge hit its lowest level since the onset of Covid-19. Other data that supports Summers' thesis is the dip in job openings and an increase in jobless claims.
He urged the Fed in the interview to review its internal models — the same models that said inflation was transitory back in 2021 — and said the Fed should hold off on making any decisions until the very last moment, given the two-sided risks the economy is facing.
The risk Summers is referring to is the balance the Fed must strike between keeping inflation in check and maintaining economic growth.<
“Whether there’s going to be another move necessary or not, I think that’s a judgment they should be holding off on until the very last kind of moment,” he said.
The Fed's next interest rate decision is due on May 3, and the chances of a rate hike currently stand at 67%, according to CME Group data.
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