Larry Summers compares the US economy to the Looney Tunes cartoon

Company

By means of Thomas Barbara

March 7, 2023 | 10:33 am

Former Treasury Secretary Larry Summers said the US economy could be experiencing a “Wile E. Coyote moment” as the Federal Reserve struggles to curb persistent inflation.

Summers, who has accurately predicted the inflation path over the past year, warned that the Fed will likely have to raise interest rates higher than the market expects.

Further hikes could push the US economy into recession as troubled consumers cut spending, he added.

“I used the term ‘risk of a Wile E. Coyote moment’ to refer to the fact that the economy could go into a bubble in a few months,” Summers said during a Monday appearance on “CNN This Morning.”

“I suspect the overhang, the savings that consumers have accumulated, has a few more months to go, but not a year left,” Summers added.

Inflation rose 6.4% year on year in January, higher than economists had expected. Prices are still well above the Fed’s inflation target of 2%.

Summers predicted that the Fed’s benchmark interest rate will be 5.5% to 6%. That would indicate multiple rate hikes in the near future.

“I don’t think there is any doubt that we don’t have inflation on a safe glide path somewhere near the 2% level yet,” Summers said. “Until the Fed is confident about that, it will tighten rather than ease.”

“I suspect that the process of reducing inflation will at some point trigger a recession, as it almost always has in the past,” he added.

Summers’ comments echoed a similar warning from San Francisco Fed president Mary Daly, who said Saturday she expects more rate hikes.

“Obviously there’s more work to be done,” said Daly. “To leave this period of high inflation behind us will likely require further policy tightening.”

Fed Chair Jerome Powell has also indicated that interest rate hatred will continue if inflation shows clear signs of a decline.

The Federal Open Market Committee that sets rates announces its latest policy move after a two-day meeting ending March 22.

Investors are counting on a 70.8% chance that the Fed will make a quarter-point hike and a 29.2% chance of a bigger half-point hike.