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Former Treasury Secretary Lawrence Summers said that instances in the postwar period when the Federal Reserve achieved soft landings for the U.S. economy -- pulling down inflation without an economic downturn -- offer little comfort for policy makers' task ahead.
Fed Chair Jerome Powell earlier this month told lawmakers that “it's more likely than not that we can achieve what we call a soft landing, and they're far more common in our history than is generally understood.” Economists have pointed to 1994, 1984 and 1969 as historical examples.
“I don't see how anybody can regard those as very relevant precedents,” Summers told Bloomberg Television's “Wall Street Week” with David Westin.
Inflation is now notably higher than it was in the three past episodes, and the labor market is “historically tight” in a way it wasn't in those cases, he said. Summers also drew a distinction with the Fed's current policy framework, which since mid-2020 allows for an overshoot of the 2% inflation target to make up for past undershooting, and doesn't automatically view a tight labor market as warranting monetary restraint.
In the historical episodes, “the whole point by the Fed was preemptive action to restrain” the economy, said Summers, a paid contributor to Bloomberg TV and Harvard University professor. “And that's what this Fed ruled out in its 2020 operating framework.”
Summers said he shared Powell's “hope that a soft landing is possible, but I don't think it's something we can count on.”
While Powell and his colleagues are now committing to a much more aggressive cycle of monetary tightening to quell the fastest inflation in four decades, Summers said there remain “problems” with the way the Fed is thinking about the challenge ahead.
Policy makers appear to view an increase in labor supply as contributing to the effort to damp inflation. But increased employment will serve to bump up demand, Summers said -- doing little to defuse price pressures.
An increase in unemployment would help to slow wage gains, but that's something the Fed has been “at pains to predict will not take place,” Summers said.
“It's likely to require significantly greater interest-rate hikes than the Fed or markets are now expecting,” the former Treasury chief said of taming inflation. “I do think that we need clear signals that we're prepared to accept some slowdown in economic activity, if that's the price of reducing inflation. Otherwise we're going to be making the mistakes of the 1970s that will ultimately create a need for a really catastrophic recession.”
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