According to former Treasury Secretary Larry Summers, the U.S. economy may be facing a “Wile E. Coyote moment” as the Federal Reserve continues to struggle to bring down inflation.
Summers, who has accurately predicted the path of inflation over the past year, warned that the Fed would likely have to raise interest rates more than the market expected.
He added that further hikes could throw the US economy into recession as struggling consumers cut back on spending.
“I used the term ‘risk of a Wile E. Coyote moment’ to refer to the fact that the economy could hit an air pocket in a matter of months,” Summers said during Monday’s appearance on “CNN This Morning.”
“I guess the overhang, the savings accumulated by consumers has a few more months to run, but not another year to run,” Summers added.
Inflation rose 6.4% year-on-year in January, more than economists had expected. Prices are still running above the Fed’s 2% target for inflation.
Summer predicted that the Fed’s benchmark interest rate would rise to 5.5% to 6%. This will signal several interest rate hikes in the near future.
“I don’t think there’s any question that we don’t have inflation on a safe glide path anywhere near the 2% level,” Summers said. “Until the Fed can count on that, it’s going to get harder rather than easier.”
“My guess is that the process of bringing down inflation will lead to a recession at some stage, as it almost always has in the past,” he added.
Summers’ comments echoed a similar warning from San Francisco Fed President Mary Daley, who said Saturday that she sees more interest rate hikes on the way.
“It’s clear there’s more work to do,” Daly said. “To put this episode of high inflation behind us, further tightening of policy, sustained over the long term, will likely be necessary.”
Fed Chair Jerome Powell has also indicated that rate hikes will continue with clear signs of a slowdown in inflation.
The rate-setting Federal Open Market Committee will announce its latest policy after a two-day meeting ending March 22.
Investors are pricing in a 70.8% chance that the Fed will implement a quarter percentage point hike and a 29.2% chance of a larger half-point hike.
