Summers: Chances of a Soft Landing Are ‘Receding’ — We Don’t Get to Inflation Target ‘Without a Meaningful Slowdown’

During an interview aired on Friday’s edition of Bloomberg’s “Wall Street Week” that took place before the January Personal Consumption Expenditures (PCE) price index inflation number was released, Harvard Professor, economist, Director of the National Economic Council under President Barack Obama, and Treasury Secretary under President Bill Clinton Larry Summers said that the chances of a soft landing are dropping and that “inflation does not get back to 2% without a meaningful slowdown in economic activity.”

Summers stated, “I think we’ve got an extremely difficult economy to read. On the one hand, we’ve got a set of very, very strong statistics. I think the data are coming in in a way that confirms the view that I have had for a long time that inflation does not get back to 2% without a meaningful slowdown in economic activity. Yes, inflation may, over some intervals, come down, but that’s really mean reversion from the transitory increases that took place, but that’s not enough to bring us to enduring 2%. The other big uncertainty that we have is that while so-called coincident indicators, things that move right along with the economy look very strong, there are a variety of leading indicators that are more troubling. Inventories look to be building up relative to sales. Firms are reporting concerns about their order books. It looks like the business sector has a lot of people on hand for the level of output they’re producing, and consumer savings are being depleted with a low savings rate, and who knows where the market’s going to go next.”

He also said, “You can always stop the car by hitting the brakes hard enough, but that doesn’t mean you can stop the car without the car skidding and sliding and hitting things. And so, yeah, the Fed can stop inflation, but whether it can stop inflation with a soft landing without impacts on economic activity, that’s been very much in doubt from the beginning here since we set off this inflation, and my own sense is that it continues to be very much in doubt. And, as the figures have come in, and particularly, the figures on non-housing services look to be running way above target level, I think the chances of a soft landing, which looked to be getting better a couple of months ago, I think are now receding a bit. What the timing will be, that is hard to know, but…we don’t have historical examples when unemployment gets below 4 and inflation gets above 4 of getting through the situation without having a recession at some point. And I think that’s a powerful historical truth, and I think it’s one that’s relevant to our current situation.”

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