Larry Summers compares the US economy to the Looney Tunes cartoon

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by Thomas Baraby

March 7, 2023 | 10:33 a.m

The US economy may experience a “Wile E. Coyote moment” as the Federal Reserve struggles to bring down persistent inflation, according to former Treasury Secretary Larry Summers.

Summers, who has accurately predicted the path of inflation over the past year, warned that the Fed is likely to raise interest rates higher than the market expects.

He added that further increases could push the US economy into recession as beleaguered consumers cut spending.

“I used the term ‘Wile E. Coyote momentary risk’ to refer to the fact that the economy could hit an air pocket in a few months,” Summers said during Monday’s appearance On CNN this morning.

Summers added, “I think the surplus, the savings that consumers have accumulated, has a few more months to go, but not another year to implement.”

Inflation swelled at 6.4% year-on-year in January, higher than economists had expected. Prices are still well above the Fed’s 2% inflation target.

Summers expected the Fed’s benchmark interest rate to be between 5.5% and 6%. This may indicate several hikes in interest rates in the near future.

“I don’t think there is any question that there is no inflation yet on a safe downward trajectory anywhere close to the 2% level,” Summers said. “Until the Fed is confident about that, it will be tightening rather than easing.”

“I suspect that the process of lowering inflation will lead to a recession at some point, as it always did in the past,” he added.

Summers’ comments echoed a similar warning from Mary Daley, president of the San Francisco Federal Reserve, who said Saturday she sees more rate hikes on the way.

“There is clearly more work to be done,” said Daly. “In order to put this cycle of hyperinflation behind us, it will likely be necessary to tighten policy further, and to maintain it for a longer period.”

Fed Chairman Jerome Powell also indicated that interest rate hikes will continue and that inflation is showing clear signs of abating.

The rate-setting Federal Open Market Committee announces its latest policy move after a two-day meeting that ends March 22.

Investors are priced at a 70.8% chance that the Fed will implement a quarter-point increase and a 29.2% chance of a larger half-point increase.