The Fed could pull off a soft landing but the US economy “isn’t out of the woods”, Larry Summers said.
Investors are debating the possibility of a “soft landing” after a series of aggressive Fed rate hikes.
Inflation is still too high and a strong January jobs report could make it difficult to ease monetary policy, the Nobel Prize-winning economist said.
Elon Musk, Paul Krugman, and Jeremy Siegel are warning the Fed risks hiking rates too high and tanking the US economy. Here’s where 7 experts see danger.
Elon Musk, Paul Krugman, and Jeremy Siegel say the Fed may be going too far with its rate hikes.
Bill Gross and David Rosenberg have also warned the central bank against tanking the US economy.
Here’s what 7 experts have said about the danger of an overzealous Fed.
Elon Musk, Paul Krugman, and Jeremy Siegel have warned the Federal Reserve risks going too far in its fight against inflation, raising the prospect of a painful recession.
Bill Gross, David Rosenberg, Robert Herjavec, and Ed Yardeni have also urged the US central bank not to hike interest rates too high, given the potentially devastating impact on the economy.
Here’s a roundup of the 7 experts’ cautions to the Fed:
Elon Musk
“The Fed is raising rates more than they should,” Musk said on Tesla’s third-quarter earnings call. “But I think they’ll eventually realize that and bring it back down again.”
The Tesla CEO and Twitter owner suggested the US central bank is overly focused on lagging indicators of inflation, and not paying enough attention to what’s ahead.
“The Fed is not listening, because they’re looking at the rearview mirror instead of looking out the front windshield,” Musk said.
Paul Krugman
“I see a strong case that the Fed has already done enough,” Krugman said in a recent column. “You want to shoot ahead of a moving target, not behind it.”
The Nobel Prize-winning economist pointed to the sharp decline in trans-Pacific shipping costs, plus flagging demand for apartments, as evidence of the inflation threat waning.
He also flagged the strong dollar’s dampening effect on US exports, and higher mortgage rates squeezing consumers and making houses less affordable.
“I’d argue that these indicators tell us that the Fed has already done enough to ensure a big decline in inflation — but also, all too possibly, a recession,” Krugman said.
Jeremy Siegel
“The Fed is slamming on the brakes way too hard,” Siegel said in a recent interview.
“The pendulum has swung too far in the other direction,” the Wharton professor added, referring to US monetary policy going from too loose to overly restrictive.
“If they stay as tight as they say they will, continuing to hike rates through even the early part of next year, the risks of recession are extremely high,” Siegel said.
Bill Gross
“The US and other economies cannot stand many more rate increases,” Gross said in a recent investment outlook.
Gross argued that huge amounts of government debt, and global headwinds such as the Russia-Ukraine war, meant that if the Fed hikes rates too far, it could “slay inflation but create a global depression.”
“If Fed stops at 4.5% then mild recession,” Gross tweeted this week. “If it goes to 5% or higher then significant US and global downturn.”
David Rosenberg
“I would posit that the Fed has already done the overkill,” Rosenberg said in a recent interview.
The Rosenberg Research founder suggested Fed officials have a “once burnt, twice shy” mentality after reacting too slowly to the inflation threat, so they’re overreacting now by raising rates too aggressively.
If the Fed continues to tighten its monetary policy, it could tank house prices, spark a credit crunch in the banking sector, weaken consumer spending, and make any economic downturn last longer, Rosenberg said.
Robert Herjavec
Consumers and enterprises are still spending money, but rising interest rates will eventually stifle that demand, Herjavec said in a recent interview.
“I worry we’re going to hit a wall, and the interest rates are going to catch up to us, and the whole thing is just going to stop,” the “Shark Tank” investor and Cyderes CEO said.
Herjavec added that he’s more worried about the Fed’s “maniacal drive with interest rates” than he is about inflation.
Ed Yardeni
“I think the Fed has to be really careful here,” Yardeni said in a recent interview.
“If they keep going without pausing, it’s really going to create a real possibility of a significant recession,” he added.
The Yardeni Associates boss pointed to declining food and energy prices as evidence that inflation is on the decline. He noted the Fed’s tightening has already hammered the housing market, and fueled the stock-market’s sharp decline this year.
8/8 SLIDES
Former Treasury Secretary Larry Summers says he’s encouraged about the prospect of the Federal Reserve pulling off a soft landing but warned the US economy is still not “out of the woods.”
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In a Sunday interview with CNN’s Fareed Zakaria, Summers said “it looks more possible that we’ll have a soft landing than it did a few months ago,” while adding that he has a continued fear of inflation. “I’m encouraged but it’s a big mistake to think we’re out of the woods,” he added.
“We had a set of inflation indicators during 2022 that were very strong and have now come back to earth but are still too high and getting the rest of way back to target inflation may still prove quite difficult,” Summers said.
Inflation has been moderating since mid-2022, with December’s reading coming in at 6.5%, the lowest level in over a year. That’s boosted investor hopes that the Fed will temper what has been an aggressive monetary tightening campaign, raising the odds of a soft landing – cooling inflation without triggering a recession.
The central bank has boosted benchmark rates by 450 basis points since last March to ease consumer price pressures. However, it has already slowed the pace of its rate increases – with the latest move delivering a 25-basis-point hike, the smallest since last March.
But for Summers, it’s not all happy news for the US economy. His comments follow a strong jobs report that saw the US add 517,000 jobs last month, more than double the 188,000 expected by analysts. Meanwhile, the unemployment rate fell to 3.4% – the lowest level in 54 years.
Such a robust labor market could stand in the way of Fed Chairman Jerome Powell’s efforts to lower inflation down to his 2% target, as a tight jobs market often leads to higher wage gains.
Summers previously warned that a US recession was more likely than not because job losses were necessary to quell inflation. The former president of Harvard University recently warned the US economy could see a “sudden stop” later this year, despite January’s strong jobs report.
