Larry Summers, who served as U.S. Treasury Secretary under President Bill Clinton and was a White House economic adviser to President Barack Obama, predicted Wednesday that the economy will experience a “downturn” in the coming months as the Federal Reserve raises interest rates to combat inflation.
When asked about the Labor Department’s most recent consumer price index (CPI) data that revealed persistent inflation during an interview on “Bloomberg: Wall Street Week,” Summers said that he was not surprised.
“Look, for me, they were unwelcome, but not wholly unexpected. I think the right reading of the data all along has been that headline inflation fluctuates substantially, but we’ve got a significant underlying inflation problem and that’s what that core inflation rate where the month was faster than the quarter, the quarter was faster than the half year, the half year was faster than the year, and the year was faster than last year, that’s what it showed, and the month was at a close to 7 percent core rate,” Summers said.
“We’ve got a substantial underlying inflation problem,” Summer emphasized. “Another way to see that was the median inflation is higher than it’s been any time since we started collecting the data.”
Summers said he would not be surprised if the Federal Reserve raised interest rates to five percent in order to curb inflation.
“Whether the Fed is going to stay the course and do what’s necessary to contain inflation, we’re gonna have to see how that plays down the road,” he said.
“History records many, many instances when policy adjustments to inflation were excessively delayed and there were very substantial costs to that,” Summers said.
He said it is important for the Fed to raise rates quickly and consistently in order to avoid stagflation, a situation in which inflation is persistent and the economy is stagnant. He argued the Fed must work to bring down inflation now before unemployment rises and growth slows further.
Summers predicted that the economy will face trouble ahead.
“We are almost certainly going to see a downturn in the economy from where we are right now and clear-eyed realism about that is the most important thing for credibility and for the best possible outcome given the inflation that has been allowed to build,” Summers said.
On Wednesday, Federal Reserve Chairman Jerome Powell announced that the Fed will raise interest rates by 75 basis points, or three quarters of one percent, in an effort to bring down inflation. Powell indicated that the Fed intends to raise interest rates for the foreseeable future and is just entering a restrictive monetary policy phase.
Current White House officials, such as Treasury Secretary Janet Yellen, previously falsely stated that inflation was “transitory.”
Summers has previously raised concerns about the economy, arguing that a recession is “almost inevitable” in July.