““The Fed has corrected and they are actually on target, but the plane is still well above a landing site. It is still going very fast and it is very unclear whether it will overshoot.””
The US economy remains a ‘difficult situation to manage’ and investors should be extremely cautious. This was said by former US Treasury Secretary Larry Summers, who spoke to Bloomberg TV on Wednesday, after data showed underlying inflation was slightly higher than expected at 3.7% on an annual basis.
Read: For stocks, this was “the worst part” of the inflation report, First Trust says
“There is no sign in all of this that we now have or are looking at a 2% inflation economy,” said Summers, who served in economic advisory roles for both the Clinton and Obama administrations.
He said the US has three options: the long-awaited soft landing, which would bring inflation under control without slipping into recession; no landing where inflation never really falls below 3% and may rise again; or a harder landing ‘while monetary policy lags’.
“I think it’s a very small window to achieve that soft landing, I’d put it about 1 in 3 on either of these possibilities. We all hope for the best, but there is no certainty that that can be achieved,” said Summers, who added that the Fed is right about data dependence.
Thursday will bring a new set of data, with August retail sales and producer prices expected at 8:30 a.m. Eastern.
“My best guess is that inflation will be a bit strong, and it is [the Federal Reserve] will have to move again in this cycle,” said Summers, who added that the central bank may have to raise rates more than once and that the market is “overestimating that possibility.”
“It’s a very difficult situation and people have to be very careful about declaring victory… and be very careful about some assets, especially in the stock market, which may be a bit perfectly priced at the moment, with more room for negative surprises. then positive surprises,” he said.
The S&P 500 index SPX is up about 16% so far this year, despite a slight pullback this summer. Technology stocks, driven by a clamor for artificial intelligence names like Nvidia NVDA,
are up 31% and have also fallen this summer, but have regained some momentum on hopes that the Fed is done raising rates.
Summers warned in 2021 about the then-increasing risks of high inflation, which turned out to be true, and has spoken out this year about the unachievability of the Fed’s 2% inflation target. But he also warned in 2021 about the risk of stagflation in the coming years, something that has not yet materialized.