“Big mistake” to think that the American economy is “out of the woods”

The U.S. economy is still not out of the woods despite recent signs of slowing inflation and stronger-than-expected economic data, former Treasury Secretary Larry Summers has warned.

Summers urged caution following a hit January jobs report last week that showed US employers added 517,000 jobs in the month and the national unemployment rate fell to just 3.4%, the lowest since 1969.

“My lingering fear is…we had a set of inflation indicators in 2022 that were very strong and have now come back to Earth, but they’re still too high,” Summers said in a Sunday interview with CNN’s Fareed Zakaria.

“They are still incredibly high from a two- or three-year perspective and it may still be quite difficult to get back on target for inflation,” Summers added. “I’m encouraged, but it would be a big mistake to think we’re off the hook.”

The jobs report data emerged just days after the Federal Reserve raised its benchmark interest rate by a quarter of a percentage point as part of its continued push to lower prices. Meanwhile, inflation fell to 6.5% in December, down from its peak of 9.1% last June.

Fed Chairman Jerome Powell noted that the process of “disinflation” was underway – but stressed that policymakers would need more concrete evidence that inflation was being meaningfully addressed before considering suspending bonds. rate hikes.

Current Treasury Secretary Janet Yellen cited the strength of the labor market as an indicator that the U.S. economy will avoid a recession during her appearance on ABC’s “Good Morning America” ​​Monday.

“You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in over 50 years,” Yellen said.

Last week, President Biden presented the jobs data as a signal that his economic platform was having a positive effect.

Summers acknowledged that we were “more likely to have a soft landing than a few months ago.” A “soft landing” would mean that the Fed’s campaign would bring inflation back to normal levels without triggering a recession or major job losses through its rate hikes.

Pundits have warned for months that the Fed’s inflation-fighting campaign could result in millions of job losses as tighter credit conditions lead companies to cut earnings. So far, the big rounds of layoffs have largely been confined to the tech sector, where giants such as Meta, Amazon and Microsoft have cut thousands of jobs.

Summers argued that the Fed should continue to prioritize getting inflation back to its 2% target level — even if that translates into a rise in the jobless rate.

“If we push inflation up and those expectations become anchored, we’re going to live with that inflation for a long time,” Summers said.

Policymakers will receive an inflation update next week when the latest consumer price index is released.