Larry Summers warns inflation outlook is ‘pretty grim,' urges Fed to move faster on rate hikes

Inflation is the worst it has been in four decades, with the price of everyday necessities like food, gasoline and cars surging in recent months.

Former Treasury Secretary Larry Summers – who predicted this would all happen nearly one year ago –  thinks the inflation problem will get worse before it starts to improve.

"I think the inflation outlook is pretty grim," Summers said Tuesday during a virtual discussion hosted by the Economic Club of New York. "And I think the Fed is a fair amount behind the curve."

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The Labor Department reported earlier this month that the consumer price index rose 7.9% in February from the previous year, marking the fastest increase since January 1982, when inflation hit 8.4%. The CPI – which measures a bevy of goods ranging from gasoline to health care – rose 0.8% from January. 

That was before the Russian invasion of Ukraine sent a shockwave through the global economy as the U.S. and its European allies responded with a slew of sanctions designed to cripple Moscow financially. The conflict, and the ensuing economic penalties, have pushed oil prices as high as $129 per barrel – further exacerbating the price spiral. 

"The effect of the war primarily, and the sanctions secondarily, will be an averse supply shock manifested in higher oil prices and higher commodity prices more generally, reminiscent – at least qualitatively – of the 1970s, at a time when given inflation threats, we very much didn't need that," Summers said.

Summers, a Harvard University professor who served in both the Clinton and Obama administrations, has repeatedly sounded the alarm over rising inflation and spent much of 2021 arguing that the Biden team, as well as Fed policymakers, have underestimated the risk of soaring consumer prices. 

He repeated that warning on Tuesday, saying it's unlikely that the U.S. central bank will be able to successfully engineer a way to tighten monetary policy and corral inflation without triggering an economic downturn.

"The probability that the Fed achieves the sort of soft landing that it forecast last week, with unemployment at 3.5% for the next three years and inflation falling close to 2%, I think that's way, way odds off," he said. 

The Fed voted last week to raise its benchmark federal funds rate by 25-basis points to a range between 0.25% and 0.5%. Officials projected at least six more, similarly sized increases over the course of this year.

But Chairman Jerome Powell made it clear this week that officials are willing to move faster to raise borrowing costs in order to cool demand if needed, including opening the door to a larger, half-point rate hike. The Fed has not raised the federal funds rate by 50 basis points since 2000.

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"If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so," Powell said on Monday while speaking at an economics conference in Washington, D.C. "And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well." 

Powell also hinted that Fed officials could proceed as early as their next meeting in May with starting to unwind the central bank's nearly $9 trillion balance sheet.

Powell maintained hope that the central bank can strike a delicate balance between taming inflation without crushing the economy – as has sometimes happened in the past – because of the strong labor market and recovery from the pandemic. 

Still, he acknowledged it will be a difficult track, particularly as fallout from the Russian invasion of Ukraine creates fresh obstacles for the Fed to navigate. 

"No one expects that bringing about a soft landing will be straightforward in the current context," Powell said.