Larry Summers Says Fed Has Done Considerable Damage To Itself By Doing This: 'It's Premature To Judge That We Have Landed Softly'

Larry Summers says a soft-landing scenario is not a guaranteed outcome as inflation still remains out of bounds.

The Federal Reserve may have hinted at a potential soft-landing, but economist and former Treasury Secretary Larry Summers is not in full agreement with the central bank.

What Happened: “I think it’s premature to judge that we have landed softly,” said Summers in an interview for the Financial Times’ “Unhedged” newsletter that was published on Friday. The economist noted that some of the underlying inflation measures were still running well above 2%.

Even if inflation was currently at 2%, it isn’t yet certain that it won’t go back up, Summers said. Among the problems he underlined were “declining flows of credit, inverted yield curves, aspects of consumer behavior, rising evidence of credit strains.”

As a result, these raise the possibility that the landing won't be soft, he said, adding, “at this point, we may soft land on the aircraft carrier, but the landing may be hard, and we may overfly.” 

If a soft landing suggests inflation above 4% and unemployment below 4%, and the economy skirts a recession, that’s something that’s never happened before in the U.S., the economist said.

“It certainly looks in play as a possibility, though I think it's a long way from assured,” he added.

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Economic Criteria For Easing: Summers said the Fed has done itself considerable damage by putting too much emphasis on forward guidance and transparency.

Responding to a question on what economic parameters he would set around a potential monetary policy easing, Summers said he would strive to not constrain himself substantially with any set of predictions or attempt to lay out his “reaction function” due to the fact that events could happen in the least expected way. “Forward guidance is a bit of a fool’s game,” he said, adding, “The market doesn't especially believe it and the Fed feels constrained by it down the road.”

The former Treasury official said he would look for “clear evidence” that inflation was “durably put down.”

“I would be very much aware that, if the transmission from monetary policy to inflation when there had been tightening was more direct and involved output less than one might have expected, there was the risk of something parallel on the loosening side,” the economist said.

“So I would be in less of a hurry,” he added.

“We may have no recession, in which case I rather doubt that the Fed will be able to cut rates by 100bp, or we may have a recession, in which case the Fed will cut rates by somewhat more than 100bp,” Summers said.

Following the December Federal Open Market Committee meeting, the central bank implied that a soft-landing scenario is likely and flagged the likelihood of the fed funds rate dropping to 4.6% in 2024. The market has been on a tear following the Fed decision, with the Dow Industrials reaching an all-time high.

The SPDR S&P 500 ETF Trust (SPY), an exchange-traded fund that tracks the performance of the S&P 500 Index, ended Friday’s session down 0.16% at $469.33 but is higher 2.4% for the week, according to Benzinga Pro data.

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