Former U.S. Treasury Secretary Larry Summers warns U.S. interest rates may need to rise higher than the market predicted in order to rein in inflation, which will almost inevitably mean pushing the world’s largest economy into recession .
Summers told the Citi Australia & New Zealand Investment Conference on Wednesday that one of the significant problems in the US economy is the so-called Big resignationwhich refers to a large wave of workers leaving their jobs after COVID.
“You don’t become a low inflation country with high wage inflation. And wage inflation looks pretty high in the United States,” he said.
According to Summers, the United States must achieve a neutral unemployment rate well above 5%, compared to 3.5% currently, to reduce wage pressures as an inflationary component.
“That’s why I felt that a recession is an almost inevitable concomitant of a path in which we have achieved substantial disinflation,” he said.
He signaled that interest rates may need to go higher than the 4.5% peak expected this year that the market is pricing in. Summers noted that even the much-loved former chairman of the US Federal Reserve, Paul Volker, was forced to raise rates more drastically to crush inflation in the early 1980s.
“My best guess is that if we’re going to bring inflation down enough and if we’re going to gain inflation credibility, rates are going to have to go up a bit more than what’s currently priced in the market.”
The U.S. Fed will release the minutes of its last meeting on Wednesday US time, with Citi economists saying that “the hawkish/dovish reading of the minutes will likely come down to the amount of talk among Fed officials about the suspension or stopping rate hikes”.
Summers’ harshest criticism, however, was not of the US Federal Reserve, which he chastised last year for not raising interest rates sooner, but of the The British Government and the Bank of England.
“Rarely have I seen such a flawed combination of policy and political communications that the new Conservative government has delivered,” he told the conference.
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