Summers Says Recession Still Looms, Fed Getting Closer to Done

(Bloomberg) — Former Treasury Secretary Lawrence Summers said that the US economy is still facing a recession this year, despite encouraging news in recent weeks.

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“One has to be careful of false dawns,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “I would stick with my view that a recession this year is more likely than not.”

Summers spoke a day after the latest US consumer-price index report showed a further slowdown in inflation to a 6.5% annual rate, the lowest since October 2021. He noted that evidence of “wage restraint” in the wake of a slowdown in earnings gains in December was “part of the good news” lately.

The Harvard University professor and paid contributor to Bloomberg Television has for some time predicted that a recession would be necessary to bring US inflation down toward the Federal Reserve’s 2% target.

The Fed’s job in raising interest rates to damp inflation is now approaching an end, Summers predicted.

Fed Expectations

“It’s a little bit premature at this point to be thinking about pausing, but we’re getting much closer to that day,” he said. But “I don’t think we have to make a definite decision beyond February” at this point, he said.

Fed policymakers are expected to hike their key rate by 25 basis points on Feb. 1, futures trading shows. That would be a further step down in the pace of increases after a 50 basis-point move in December and four boosts of 75 before that. Futures suggest one final quarter-point hike in the spring.

“The more optimistic possibilities” of averting an economic downturn look “more plausible today than they did several months ago,” Summers said. At the same time, consumer-price gains in excess of 6% are “still inconceivably high” compared with the pre-pandemic period, he said.

A key gauge to monitor will be the employment cost index for the final quarter of the 2022, Summers said. The ECI — a broader measure of labor costs than the monthly hourly earnings indicator — is the “gold standard” of such indicators, he said.

That report is due Jan. 31, a day before the Fed announces its next rate decision. In the first quarter of last year, the ECI rose by the most on record in data going back to 1997.

As lawmakers gird for what’s set to be an intense political battle to raise the federal US debt limit, the former Treasury chief blasted such fights as the “dumbest” debates in Washington. Republicans in the House, a chamber they now control, have warned that they’ll insist on spending cuts in return for raising the ceiling and averting a US payments default.

Read More: ‘Doomsday Clocks’ Likely Needed Before Congress Hikes Debt Limit

“A default would be a catastrophe — it would mean higher borrowing costs forever,” Summers warned.

That said, he called for a debate on underlying US fiscal policy, given the likely need to “very substantially” boost national-security spending in coming years, along with challenges including rising healthcare costs.

“We are going to have to look at the revenue base of the federal government,” he said. “That will involve some quite fundamental debates.”

(Updates with comments on debt-limit debate starting in last four paragraphs.)