Full Summers Interview: Recession Is Coming; Fed Is 'Behind The Curve'

[00:00:00] Speaker 1: President Biden is continuing to make the case that the economy is still strong. [00:00:05] Larry Summers: We've created 8.7 million new jobs in 16 months, an all-time record. [00:00:12] Speaker 1: But if people aren't listening, it's because inflation is eating away at wage increases. The Dow now is down 18% for the year so far after another rough week. The Fed just raised interest rates three-quarters of a point. And there are real doubts that the Fed has the ability to actually cool inflation without triggering a recession. Larry Summers, President Clinton's Treasury Secretary and, of course, an advisor to President Obama, he saw high inflation coming and says there's real danger of a recession ahead. And he joins me now. Mr. Summers, welcome back to Meet the Press. Happy Father's Day, Chuck. Thank you, and happy Father's Day to you. Let me start with sort of two takes on what's coming. One, you got President Biden in an interview with the Associated Press. He said a recession is not inevitable. Secondly, we're in a stronger position than any nation in the world to overcome this inflation. And then you've got Jamie Dimon, who essentially says there, I said there were storm clouds, big storm clouds hanging over this economy, and now it's a hurricane. So, can both statements be true, or essentially is one person seeing a recession and another person not? [00:01:25] Larry Summers: Look, nothing is certain, and all economic forecasts have uncertainty. My best guess is that a recession is ahead. I base that on the fact that we haven't had a situation like the present with inflation above four and unemployment below four without a recession following within a year or two. And so, I think the likelihood is that in order to do what's necessary to stop inflation, the Fed is going to raise interest rates enough that the economy will slip into recession. And I think that view, which was not a common view a couple months ago, is now the view of a number of statistical models and the view of a range of forecasters, and I think will increasingly become a consensus view. [00:02:24] Speaker 1: Is a recession a mild one necessary in order to tame inflation? Can inflation at this point be tamed without triggering a recession? [00:02:39] Larry Summers: I don't think there are historical precedents for inflation at the rate we now have it coming down to the target the Fed has set of 2 percent without a recession. I think all the precedents point towards a recession, Chuck. There's always a first time for everything, and I don't want ever to make forecasts with certainty. But if you look at a whole range of indicators, if you look at what's happened in markets, if you look at the relative levels of interest rates of different durations, if you look at surveys of consumer expectations, and if you look at the simple fact that what drives inflation is supply and demand, supply doesn't change that fast. And so mostly what you need to do to reduce inflation is reduce demand. And that is a very hard process to control. And so it usually leads to a recession. All of that tells me that while I wouldn't presume to be able to judge the timing, the dominant probability would be that by the end of next year, we would be seeing a recession in the American economy. [00:04:09] Speaker 1: Look, there's two things the administration is at least pondering in order to deal with high costs, provide some relief. But I'm curious if you think those decisions could actually end up unfortunately contributing to inflation. So one would be a gas tax holiday, right? So you're lowering the price, making it easier for folks to go out there and buy more gas. And then the second is taking out off some of these Trump-era tariffs. Are any of those, if they're done as a relief mechanism for high prices, do any of those become inflationary? Is there a risk of both of those triggering a little bit more inflation? [00:04:50] Larry Summers: Look, I think cutting the tariffs is clearly a good idea. It will hold down prices. It will enable us to take a more strategic approach to dealing with China. It could take a percentage point or more off the CPI over time. Cutting tariffs is the right thing to do, and I hope the administration will find a way to do it. I'm no fan of the gas tax holiday. I think that's kind of a gimmick, and eventually you have to reverse it. I'll tell you what the most important thing is, Chuck, and I'm not sure it can save the situation and prevent a recession, but it would be a very positive contribution. If at long last we can have some kind of bipartisan budget bill with three elements, with reduction of pharmaceutical prices, which will help health care and will also reduce the inflation rate. That's within our reach if we just use the government's large purchasing power through Medicare, number one. Number two, put in place the partial repeal, not the full repeal, but the partial repeal of the Trump tax cuts, which would take some demand out of the economy, increase confidence and reduce pressure on the Fed. And number three, an all-in, more energy supply approach that emphasizes freeing up fossil fuels in various ways in the short run and making, with government support, the ultimate pivot to renewables. All of that would take pressure off the Fed, would bring down the inflation rate, would operate to restore confidence, and would, I think, be a very positive contribution. I'm not privy to all the discussions and negotiations that are going on in Washington, but surely the most important thing for any public-spirited people is to try to find a deal along those lines. [00:07:10] Speaker 1: Very quickly, a lot of business leaders are frustrated by the Fed. They felt like, you know, the Fed didn't act soon enough. You certainly thought the Fed should have acted sooner. Any concern that the Fed's now going to overreact? Raise interest rates too high while also pulling money out of the market, the quantitative tightening. Is there a bigger risk of them doing too much, or do you still worry that they're going to do too little? [00:07:38] Larry Summers: I think they've got to find a balance. But, you know, Chuck, when the doctor prescribes antibiotics, if you stop taking them the moment you feel better, it can often be a mistake to not carry through. And the worst thing we could do would be to start to stop inflation and not do enough to slay the dragon. So I think the Fed has to be very, very careful here on that issue. They have made huge mistakes of being behind the curve. Their models, to be honest, I don't think are accurate for the current situation. I think even their latest forecast at this last meeting was, I think, wishful thinking in believing that they could restrain inflation with unemployment, simply rising to slightly above 4%. So it's a hard job for the Fed. [00:08:44] Speaker 1: Larry Summers, former Treasury Secretary, former Chief Economic Advisor to President Obama, really appreciate you coming on and sharing your perspective with us. And again, happy Father's Day. When we come back. Thank you.