Ex-Treasury Secretary Larry Summers dismissed optimism sparked by a solid August jobs report, warning that a stronger labor market could actually make inflation worse.
Summers delivered his latest dire outlook for the US economy after federal data showed US employers added a robust 315,000 jobs last month. The report included a higher-than-expected 62.4% labor force participation rate, stoking optimism that tight labor conditions that contributed to inflation are easing.
“I think the increases in participation are good news, but I think there’s a tendency to exaggerate how much higher participation will reduce inflation,” Summers said during an appearance on “Bloomberg” Friday.
“People think of it as extra labor supply, but they forget that if the unemployment rate stays the same and participation goes up, more people are working, earning and therefore spending, and that in turn raises the labor demand.”
While the national unemployment rate increased slightly to 3.7% last month, the rosy labor report provided a glimmer of hope that the Federal Reserve will be able to engineer a “soft landing” for the US economy. The Fed has signaled it will continue hiking interest rates until inflation meaningfully recedes.
The Fed projected in June that unemployment would increase to just 4.1% by 2024 as tighter economic policy and increased borrowing costs weighed on employers.
But Summers, a frequent critic of the Fed’s response to inflation over the last several months, argued the central bank’s predictions were a “substantial underestimate of where we’ll be one year and two years from now.”
He described optimism about a potential soft landing as “the triumph of hope over experience” and predicted unemployment would need to rise much higher for the Fed to properly address inflation, which hit 8.5% in July.
Summers reiterated that he’d be “surprised if we get to the 2% inflation target without an unemployment rate that approaches or exceeds 6%.”
The ex-Obama economic adviser has warned for months that millions of Americans will need to lose their jobs as policy was tightened to sufficiently bring down prices.
Stocks initially jumped Friday on the healthy August jobs report, but gave up their gains and turned negative by the early afternoon as investors digested the data.
Fed Chair Jerome Powell acknowledged the likelihood of more job losses during a speech in Jackson Hole, Wyoming, last month — noting that the central bank’s plan would inevitably result in “some pain” for households.
