Former US treasury chief sees signs Fed tightening is having impact on US economy

FORMER US Treasury Secretary Lawrence Summers said evidence is starting to emerge that US Federal Reserve actions are having an impact on the US economy, with some indications of a turn in labour demand and increased stockpiles of unsold items.

“We’re seeing a little bit of indications that some firms are no longer reporting the kind of huge labor shortages that they were before,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “We’re seeing some indications of inventory buildups.” 

Summers’s comments echoed those of some observers picking up on shifts not yet immediately apparent in broad economic indicators. The May US employment report Friday (Jun 3) showed a stronger-than-expected gain in payrolls, with more Americans joining the labour force and unemployment remaining close to 50-year lows.

Rick Rieder, chief investment officer of global fixed income at BlackRock, earlier Friday cited a “long list” of companies freezing hiring plans, across technology, healthcare and other sectors, and signs of companies having improved availability of labour. Rieder also warned payrolls could contract within 3 or 4 months.

Summers said he saw “a lot of strength” in the jobs report as well as “some beginnings of the evidence of monetary policy working.”

The overall picture remains one of a “very stretched economy”, said Summers, a Harvard University professor and paid contributor to Bloomberg Television. 

Recession risk

The former Treasury chief noted again that history shows when inflation exceeds 4 per cent and unemployment drops below 4 per cent a recession occurs within 2 years.

“My best guess would be that’s what we’ll see this time round,” he said.

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“I don’t think we have the tools to bring this down smoothly”, after excess demand was created with fiscal stimulus in 2021, Summers said. 

Fed Vice Chair Lael Brainard this week reiterated the expectation that the US central bank will raise interest rates by half a percentage point in June and July. She also said that the case for a pause in hikes in September was “very hard”.

While Fed policy makers are not able to directly affect supply shocks, that should not stop them from shrinking demand to pull down inflation, Summers said.

“If the capacity of the economy to produce has been reduced, we’ve got to reduce the level of demand,” he said, also highlighting that wage inflation is the basis for much of the current surge in consumer prices.

While the Fed will do its best, “there may not be any path of monetary policy that enables inflation to come down to the 2, 3 per cent range and also keeps the economy growing rapidly”, Summers said. BLOOMBERG