‘Big mistake’ to think US economy ‘out of the woods’

The US economy still isn’t “out of the woods” despite recent signs of cooling inflation and stronger-than-expected economic data, ex-Treasury Secretary Larry Summers warned.

Summers urged caution in the wake of a blockbuster January jobs report last week that showed US employers added 517,000 jobs in the month and the national unemployment rate fell to just 3.4% — the lowest since 1969.

“My continued fear is … that we had a set of inflation indicators during 2022 that were very strong that have now come back to Earth, but they’re still too high,” Summers said during a Sunday interview with CNN’s Fareed Zakaria.

“They’re still unimaginably high from the perspective of two or three years and that getting the rest of the way back to target inflation may still prove to be quite difficult,” Summers added. “I’m encouraged, but it would be a big mistake to think we’re out of the woods.”

The strong jobs report data surfaced just days after the Federal Reserve hiked its benchmark interest rate by a quarter percentage point as part of its continued effort to lower prices. Meanwhile, inflation fell to 6.5% in December, down from its peak of 9.1% last June.

Fed Chair Jerome Powell noted that the “disinflation” process was underway — but stressed that policymakers would need more concrete evidence that inflation was meaningfully addressed before they would consider pausing rate hikes.

Current Treasury Secretary Janet Yellen cited the strong labor market as an indicator that the US economy would avoid a recession during her appearance on ABC’s “Good Morning America” on Monday.

“You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years,” Yellen said.

Last week, President Biden touted the jobs data as a signal that his economic platform was having a positive effect.

Summers acknowledged that it was “more possible that we’ll have a soft landing than it did a few months ago.” A “soft landing” would mean that the Fed’s campaign brought inflation back to normal levels without triggering a recession or significant job losses through its rate hikes.

Experts have warned for months that the Fed’s inflation-fighting campaign could lead to millions of job losses as tightened credit conditions led companies to trim their bottom lines. So far, major rounds of layoffs have been largely limited to the tech sector, where giants such as Meta, Amazon and Microsoft have cut thousands of jobs.

Summers argued that the Fed should continue to prioritize bringing inflation back to its 2% target level — even if it does result in an increased unemployment rate.

“If we push inflation up and those expectations become entrenched, we’re going to live with that inflation for a long time,” Summers said.

Policymakers will get an update on inflation next week, when the latest Consumer Price Index is released.