- Former Treasury Secretary Larry Summers said it's hard to judge whether falling inflation will stay down.
- He compared inflation to a half-way healed "infection" that could return, in a harder fight for the Fed if not properly treated.
Former Treasury Secretary Larry Summers compared falling levels of inflation in the US economy to a half-way healed "infection" that could worsen if not treated properly.
Speaking on NPR's 'Here & Now Anytime' podcast Wednesday, the American economist and former president of Harvard University said there's no doubt consumer price pressures have eased and the economy is very strong, given a low unemployment rate.
However, "the hard thing to judge is whether inflation is on a strong enough downward trajectory to get to the 2% target, and whether, if inflation comes down, it will stay down," Summers said.
Inflation has been easing since mid-2022, with December's reading coming in at 6.5%, the lowest level in over a year. The successful drop was helped by the Federal Reserve's aggressive interest-rate campaign, where it's raised rates by 450 basis points to bring inflation down to its 2% target.
Despite price pressures cooling, there's still concern among investors that January's strong jobs report could fuel inflation again. A tight labour market often leads to higher wage gains.
Against that backdrop, Summer suggests the US central bank will need to navigate its fight against inflation delicately.
"We've all had the experience of taking a course of drugs and giving up, stopping the drugs before the course was exhausted but simply because we felt better. And then, whatever infection we had came back, and it was harder to fight the second time," he added.
"That's the concern the Fed is going to have to balance and it's going to be a very difficult balancing act," Summers continued.
Meanwhile, Summers noted that the US economy will experience a slowdown as the Fed maintains its tight monetary policy, adding that the odds of a recession in the next year are "more likely than not."