Larry Summers Says Declaring ‘Proverbial Soft Landing’ Is ‘Premature,’ Asserts Inflation Still A ‘Source of Concern’

Former Treasury Secretary Larry Summers said on Friday that inflation continues to remain the most important risks in the year ahead.

Inflation Risk Lingers: The outcome as far as inflation is concerned came closer to the prediction of Team Transitory, said Summers in an interview with Bloomberg. Team Transitory, led by Nobel laureate Paul Krugman had argued that the inflationary pressure seen since the aftermath of COVID-19 pandemic was transitory, engendered by supply chain challenges.

Summers said he never viewed the U.S. as a 7% or 8% inflation country, as the bottlenecks that led to the spike in inflation were bound to come down, subtracting from inflation. That said, he did not view the Fed’s inflation norm as a prudent number.

”I’m not sure we’re really a 2% target inflation country in any durable sense,” Summers said, pointing to the 5.2% wage increase the federal government announced for 2024, still-tight labor markets and the inflection seen in house prices.

“And I’m far from sure where we’re going to go on inflation. So to declare that proverbial soft landing to have taken place seems to me to be premature,” the former Treasury official said.

The economy is in an ambiguous situation, Summers said. The hard landing never came in 2023 and it wasn’t very surprising, given neutral rates have gone up, rendering the monetary policy not as contractionary as many people expected, he said.

The economist, however, warned of risks looking ahead. ”And I think there’s still a risk that the market is probably underestimating, that we’re not going to quite make as much progress on inflation,” he said.

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Inflation Vs. Recession: Going into the next year, Summers said he sees both inflation and recession as ”very real risks.” “I’m a little surprised by the view that puts primary emphasis on the recession risk, given what has happened to financial conditions in the last few months,” he said.

The stock market has taken off again, house prices were rising at a 6-7% annual rate, and long-term rates, including the mortgage rates, have come down substantially, the economist noted. “I think that in a way, we’ve already seen a substantial easing of financial conditions,” he said.

“And so I think we’d better be a bit careful…