Former Treasury Secretary Larry Summers has brushed off the optimism sparked by strong August jobs numbers and warned that a strong labor market could actually exacerbate inflation.
Summers released his latest dismal outlook for the U.S. economy after federal data showed U.S. employers added a solid 315,000 jobs last month. The report includes his better-than-expected labor force participation rate of 62.4%, adding to optimism that the tight working conditions that have contributed to inflation are easing.
“I think the increase in attendance is good news, but I think they tend to overstate how much it will hold back inflation,” Summers said in an appearance on Bloomberg on Friday.
“People think of it as additional labor supply, but if the unemployment rate stays the same and the labor force participation rate rises, more people will work, earn, and therefore spend, which will increase the demand for labor. I forgot.”
The national unemployment rate rose slightly to 3.7% last month, but the rosy labor data offered a glimmer of hope that the Federal Reserve could engineer a “soft landing” for the US economy. The Federal Reserve has suggested it will continue to raise interest rates until inflation subsides significantly.
In June, the Fed predicted that tightening economic policy and rising borrowing costs would weigh on employers, pushing the unemployment rate up to just 4.1% by 2024.
But Summers, who has been a frequent critic of the Fed’s response to inflation over the past few months, argued that the Fed’s projections “greatly underestimate what the Fed will look like in a year and two.”
Describing optimism about the possibility of a soft landing as “hope triumphs over experience,” he said the unemployment rate needs to rise further if the Fed is to adequately deal with inflation, which reached 8.5% in July. predicted.
“It would be surprising if we could hit our 2% inflation target without the unemployment rate approaching or exceeding 6%,” Summers reiterated.
An economic adviser to former President Barack Obama has warned for months that millions of Americans will have to lose their jobs as policies are tightened to bring prices down enough.
Stocks initially surged on Friday after a healthy August jobs report, but gave up on the gains and turned negative in the afternoon as investors digested the data.
In a speech in Jackson Hole, Wyoming, last month, Fed Chairman Jerome Powell acknowledged the possibility of further unemployment and noted that the central bank’s plans would inevitably bring “some pain” to households.