Larry Summers Says Market Reposing 'Too Much Confidence In Mother Fed,' Warns 2% Inflation Target Might Not Be Met Without Significant Downturn

The financial markets received this week tamer producer and consumer prices inflation with a lot of verve, as is seen from the rally in most risky bets. Former Treasury Secretary and economist Larry Summers, however, suggested that the inflation fight may not have been won yet.

What Happened: “Transitory factors” have been an element in the faster-than-expected slowdown in U.S. inflation, said Summers in an interview with Bloomberg. The transitory factors that were pushing inflation up from bottlenecks that are now mean reverting and are pushing inflation down, he added.

“Given how strong the economy has been, there's still a surprise in what's happened to inflation,” the economist said.

Delving into the reasons why inflation slowed, Summers cited the Jerome Powell-led Federal Reserve’s tighter-than-expected monetary policy. The central bank mounted the most aggressive increases in the benchmark fed funds rate in decades, he said.

That said, the fact that people took the inflation fears seriously was good, the former Treasury official said.

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Daunting Task Ahead: Summers said the path to get inflation back to the Fed’s 2% target may prove more challenging than investors think. The possibility of a soft landing in the economy, which is bringing price gains returning to 2%, without a significant economic downturn is remote, he said.

The odds of a recession in the first half of 2024 are just 20-25%, given factors, including the recent strength in inflation-adjusted income, the economist said. “There's been a little bit of prematurity in some of the declarations of victory,” he said.

Summers said the surge in retail stocks this week on hopes that a recession is now off the table doesn’t seem a “wise market response.” “Some people may have too much confidence in Mother Fed,” he said.

"I'm not sure the inflation figures over the next two years are going to be quite as favorable as the market is expecting — especially in light of the geopolitical risks around oil and some other commodities,” he added.

The iShares TIPS Bond ETF TIP, an exchange-traded fund that tracks the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Wednesday’s session down 0.43% at $103.97, according to Benzinga Pro data.

Photo: International Monetary Fund on Flickr

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