Larry Summers warns unemployment must rise to cool inflation

Larry Summers

Larry Summers says the unemployment rate will likely rise much higher as the Fed tightens policy. Getty Images

Thomas Barraby

New York Post

Ex-Treasury Secretary Larry Summers warned that millions of currently employed Americans must lose their jobs in order for the Federal Reserve to succeed in its bid to cool inflation.

Summers, an outspoken critic of the Fed’s delayed response to surging inflation, said the national unemployment rate will likely rise far above its current level of 3.6% to bring down steep prices currently slamming Americans’ wallets.

“We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” Summers said Monday during a speech in London, according to Bloomberg. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”

The Fed last week hiked its benchmark interest rate by three-quarters of a percentage point for the first time since 1994. The move exacerbated concerns about its ability to bring prices down without upending the labor market or triggering a recession.

The central bank currently projects that inflation will return to the approximately 2% level it deems acceptable by 2024 – even as Fed Chair Jerome Powell warned that “further surprises” could be in store in the coming months.

At present, the Fed expects the national unemployment rate to tick slightly higher to about 4.1% in 2024, well below the level Summers warned was possible to sufficiently address the inflation crisis.

“The gap between 7.5% unemployment for two years and 4.1% unemployment for one year is immense,” Summers added. “Is our central bank prepared to do what is necessary to stabilize inflation if something like what I’ve estimated is necessary?”

Higher levels of unemployment have historically accompanied the tightened monetary policy required to lower inflation. Companies often cut jobs and slash budgets in response to higher interest rates.

As The Post reported, cryptocurrency firms such as Coinbase and real estate firms Redfin and Compass have already announced job cuts this month in response to worsening market conditions.

Summers’ remarks were the latest indication of his bleak outlook for the US economy. Last week, he said that he viewed an economic recession within the next two years as increasingly likely.

“When inflation is as high as it is right now and unemployment is as low as it is right now, it’s almost always been followed, within two years, by recession,” Summers said during an appearance on CNN.

Meanwhile, President Biden and Treasury Secretary Janet Yellen have insisted that a recession is still avoidable, despite mounting warnings from banks and prominent economists.

 

 

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