Larry Summers compares the US economy to the Looney Tunes cartoon

Business

By Thomas Barrabi

March 7, 2023 | 10:33 am

The U.S. economy could face a “Wile E. Coyote moment” as the Federal Reserve scrambles to bring down persistent inflation, according to former Treasury Secretary Larry Summers.

Summers, who has accurately predicted the path of inflation over the past year, warned that the Fed will likely have to raise interest rates higher than market expectations.

Further increases could tip the U.S. economy into a recession as embattled consumers cut spending, he added.

“I used the term ‘risk of a Wile E. Coyote moment’ to refer to the fact that the economy could reach an air pocket in a few months,” Summers said during a Monday appearance on “CNN This Morning”.

“I guess the overhang, the savings that consumers have accumulated has a few more months to run, but it doesn’t have another year to run,” Summers added.

Inflation rose 6.4% year-on-year in January, more than economists had expected. Prices are still well above the Fed’s 2% inflation target.

Summers predicted the Fed’s benchmark interest rate would hit 5.5% to 6%. This would indicate several interest rate hikes in the near future.

“I don’t think there’s any doubt that we still don’t have inflation on a secure glide path anywhere near the 2% level,” Summers said. “Until the Fed can be convinced of this, it will tighten rather than loosen.”

“I suspect the process of reducing inflation will lead to a recession at some point, as it almost always has in the past,” he added.

Summers’ remarks echoed a similar warning from San Francisco Fed President Mary Daly, who said on Saturday she expects more interest rate hikes underway,

“Clearly there is still work to be done,” Daly said. “In order to put this episode of high inflation behind us, further policy tightening, sustained for longer, will likely be required.”

Fed Chairman Jerome Powell also signaled that rate hatred will continue if inflation shows clear signs of waning.

The Federal Open Market Committee on Rates will announce its final policy decision after a two-day meeting that ends March 22.

Investors are pricing in a 70.8% chance of the Fed implementing a quarter-point hike and a 29.2% chance of a larger half-point hike.