Former Treasury Secretary Lawrence Summers has expressed concern that the Federal Reserve's current economic forecasts might be overly positive, hinting at potential surprises in the form of accelerated inflation and slower growth. Summers, who is also a Harvard University professor and a contributor to Bloomberg TV, suggested that the Fed's predictions could lead to a stagflation-like scenario.
The Federal Reserve officials have recently upgraded their economic growth expectations for this year and the next, while lowering their core inflation forecast for the current year. They anticipate it to reach 2.6% by the end of 2024, close to their 2% target. However, Summers cautioned that there might be a higher risk of rates needing to rise more than currently anticipated.
Fed Chair Jerome Powell emphasized caution in policy decisions after interest rates remained unchanged on Wednesday. He stated that his primary expectation was not a soft landing and downplayed the significance of median forecasts from policymakers. In response, Summers applauded Powell for his readiness to adapt flexibly to evolving data and outlooks but criticized the Fed for its slow transition away from signaling future actions.
Despite economists increasingly dismissing a U.S. recession in recent months, Summers remains cautious. He cited slowing price and wage gains alongside robust economic growth as reasons for optimism. Goldman Sachs Group Inc (NYSE:GS)., earlier this month, estimated only a 15% chance of an economic downturn.
However, Summers highlighted several risks facing the economy, including a strike by United Auto Workers union against car manufacturers, a fiscal deficit nearing 8% of GDP after accounting for student loans, rising health insurance costs potentially fueling inflation, signs of reduced consumer spending post-Labor Day coupled with an increase in loan delinquencies, and a potential rise in borrowing costs as corporate loans and bonds are renewed.
Summers also pointed out the significant changes in the economy over the past few decades due to shifts in labor power. He cited recent labor disputes and the possibility of a significant wage settlement as factors that could inspire workers nationwide and potentially impact the economy's functioning for a considerable time. He added that these labor developments could intensify wage pressure and complicate inflation-related issues.
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