Former Treasury Secretary Lawrence Summers discounted any optimism over an influx of people into the US labor force in August, focusing instead on the inflationary potential of continued strong employment gains.
(Bloomberg) — Former Treasury Secretary Lawrence Summers discounted any optimism over an influx of people into the US labor force in August, focusing instead on the inflationary potential of continued strong employment gains.
“There’s a tendency to exaggerate how much higher participation will reduce inflation,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “People think of it as extra labor supply, but they forget” about the rise in employment that increases incomes and therefore spending, in turn boosting demand for labor, he said.
Summers spoke hours after the August employment report, which showed an unexpectedly large jump in the labor-force participation rate, to 62.4%. Some observers took heart that the stream of new job seekers will ease labor-market tightness that has helped to stoke inflation.
Ultimately, the US unemployment rate may need to surpass 6% — from the 3.7% reported for last month — in order for the Federal Reserve to bring inflation back to its 2% target, said Summers, a Harvard University professor and paid contributor to Bloomberg Television.
Summers reiterated that he’d be surprised if the Fed gets inflation to 2% “without an unemployment rate that approaches or exceeds 6%.”
Soft vs Hard Landing
By contrast, Fed officials in June projected unemployment to rise to just 4.1% in 2024. Policy makers will issue a new set of forecasts at their meeting later this month.
Summers deemed a soft-landing scenario as representing “the triumph of hope over experience,” adding “that’s not the preponderant probability.”
Treasury Secretary Janet Yellen, for her part, said on MSNBC, “I personally believe there is a path to accomplishing” a soft landing, while terming it a “difficult” task.
Separately, Summers expressed “considerably anxiety” about China’s economic prospects in face of its “pretty deep, profound and severe” set of problems. Private-sector economists have continued to cut Chinese economic-growth forecasts as Beijing sticks to its policy of draconian lockdowns to contain Covid and as the nation’s property slump continues.
“I have learned over time to watch what happens to capital flows, and when a country’s wealthy citizens are trying to take their money out, that’s a time to be nervous about the near-term economic prospects,” Summers said. “That certainly is the case in terms of what people are trying to do in China today.”
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