“‘The risk is that we’re going to hit the brakes very, very hard.’ ”
— Larry Summers
Almost a full year of monetary-policy tightening by the Federal Reserve appears to be having little impact on price pressures, putting policy makers in danger of needing to do much more, according to former U.S. Treasury Secretary Larry Summers.
A steady stream of data from January underscores just how resilient the U.S. economy — and, with it, inflation — remains, despite eight straight interest-rate hikes by the Fed since last March, which together have taken borrowing costs to their…
2023-02-17 14:42:00
Post from www.marketwatch.com
On Thursday, prominent American economist Larry Summers warned of the potential risks of a harsh braking by the US economy in the near future, predicting that if policy makers make the wrong decisions, there could be a significant slow down that could have severe consequences.
Summers, who served as the director of the National Economic Council under President Obama, noted that the current U.S. economy is enjoying relatively strong growth compared to other developed nations, but cautioned that policy makers should not become complacent. He cited several structural weaknesses in the global economy as factors that could affect the U.S. economy in the future, including slowing global trade and persistent geopolitical conflicts.
Specifically, Summers warned of a “substantial deceleration” in the U.S. economic growth rate if policy makers don’t make the right decisions. He highlighted the potential conflict between pro-growth policies and those aimed at reducing the high levels of public and private debt that accumulated since the financial crisis of 2008.
“Simply hoping it’ll all somehow work out won’t be enough,” he said. “It won’t unless policies and politics are as much on the side of reversing debt accumulation as of stimulating growth.”
Summers argued that a forced decrease in the Federal Reserve’s balance sheet, a stronger dollar, or a higher-than-expected inflation rate could all contribute to a slowdown in growth. At the same time, however, he noted that the long-term debt and deficit outlook for the government is unsustainable and continues to remain a significant problem.
Overall, Summers argued that policy makers need to find a balance between growth-promoting policy and reducing public and private debt, while being careful not to overshoot and put the economy in a weaker position than it was before. He encouraged the US to continue with its current pro-growth policies, but to remain mindful of the risk of harsh braking if the right decisions are not made.