Larry Summers Says Can't Get Wage Inflation Down Without 'Meaningful' Slack In Job Market — Believes Recession Prospects 'Certainly Lower'

Former Treasury Secretary Lawrence Summers said he maintains his view that inflation cannot be brought down to the 2% range without getting wage inflation substantially down.

"You don't get wage inflation substantially down without meaningful slack in the labor market and we don't have slack in the labor market,” Summers said in an interview with Bloomberg Television.

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Major Wall Street indices gained over 2% on Friday following the release of the employment data that showed December payrolls rose more than expected. Wage increases slowed and services activity contracted reducing concerns about the Federal Reserve's interest rate hiking path. The SPDR S&P 500 ETF Trust SPY closed 2.29% higher while the Vanguard Total Bond Market Index Fund ETF BND gained 1.10%.

On Recession Prospects: The former Treasury Secretary thinks prospects of a recession in the winter or the spring of 2023 are certainly lower right now. He further highlighted that the central bank’s views have come around to those quite close to him.

“They think inflation is the primary concern, they explicitly recognize that there's going to need to increase in unemployment to contain inflation, he said. “They're showing awareness of the fact that the neutral interest rate is a real interest rate concept rather than a nominal interest rate concept. They're recognizing that the trade-off is not between unemployment and inflation but between unemployment and the level of entrenched in inflation.”

Summers said he finds it interesting that the Fed is indicating a commitment to tighter policies, more focus on resisting inflation than the market is expecting they will carry through on it. “I think I would be closer to the Fed at this point in terms of judging what will happen than I would be to the market,” he said.

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Photo by Brookings Institution on Flickr