Larry Summers warns of looming recession over surging inflation

Summers says US has 'fairly serious inflationary situation'

Former Treasury Secretary Larry Summers on Thursday warned the U.S. economy could slide into a recession as the Federal Reserve takes what he described as long-delayed action to cool the hottest inflation in nearly four decades.

Summers, during an interview on a Bloomberg Economics podcast, said the U.S. central bank has been late to spot the dangers of inflation, and that steps it takes now to mitigate soaring prices risk tipping the economy into a slump.

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"If I thought we could sustainably run the economy in a red-hot way, that would be a wonderful thing, but the consequence – and this is the excruciating lesson we learned in the 1970s – of an overheating economy is not merely elevated inflation, but constantly rising inflation," Summers said. "That’s why my fear is, that we are already reaching a point where it will be challenging to reduce inflation without giving rise to recession."

Summers, a Harvard University professor who served in both the Clinton and Obama administrations, has repeatedly sounded the alarm over rising inflation and has spent much of 2021 arguing that the Biden team, as well as Fed policymakers, have underestimated the risk of soaring consumer prices. 

He has warned that putting off tackling inflation will only require more severe action down the road that could undermine the economy's recovery from the pandemic.

"We’ve got a fairly serious inflationary situation," Summers said. 

Soaring inflation that has shown no signs of slowing down has forced the central bank and the White House to shift closer to Summers' stance. The government reported earlier this month that prices jumped 6.8% in November from the previous year, the fastest pace since June 1982, when inflation hit 6.1%. 

A separate report out Thursday morning showed the Fed's preferred inflation gauge also hit a 39-year high last month, surging to 5.7% – well above the central bank's preferred target of 2%.

Last week, the Fed took a hawkish pivot, announcing that it would accelerate its withdrawal of support from the economy in order to tackle rising prices.  

The Federal Open Market Committee said at the conclusion of its two-day policy-setting meeting that it would double the reduction of its asset-purchase program to $30 billion a month, a timeline that could phase out the purchases entirely by March rather than the original June trajectory laid out last month.

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Although policymakers voted to hold rates near zero, where they have sat since March 2020, new economic projections show that a majority of Fed officials have penciled in three rate hikes next year. 

Officials now project rates to stand at 0.9% at the end of 2022, 1.6% at the end of 2023 and 2.1% at the end of 2024.

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