Is the economy headed for a hard landing or a soft landing? That’s a question that’s on many people’s minds after the Federal Reserve’s third and most recent rate hike last week. And it’s the question former US Treasury Secretary Lawrence Summers and current Minneapolis Federal Reserve Bank President Neel Kashkari answered during an online question-and-answer session on the economic outlook hosted by the Wall Street Journal on Tuesday.
Below are excerpts from their conversation:
Is the Fed backing aggressive rate hikes to beat inflation?
Kashkari: “The only other time I’ve seen us so united was at the beginning of the pandemic when we knew we had to act boldly to support the economy through the pandemic and downturn. We are all united in our task of bringing inflation back to 2% and we commit to doing whatever we need to do to get there. And that leads to a further tightening of monetary policy in the short term. Ultimately, it’s not just up to us how much we have to do. It will also be determined by the supply side of the economy and whether we get help on the supply side.”
Is the Fed exaggerating with rate hikes?
Summer: “No. I think the Fed allowed itself to be way behind the curve for a long time in 2021-early 2022, sacrificing a fair amount of credibility in the process. And in that context, it is necessary to act very forcefully and be very clear and direct… It is imperative that we do what is necessary to bring down inflation significantly, and the more decisively that is done, the less painful the process is likely to be. Of course there is a risk that it will be overdone, but at the current level of the 3% Fed Funds Rate … I certainly don’t think it is overdone yet.”
What should the Fed be looking at to decide when the federal funds rate is at the right level?
Summers: “I would watch very closely what is happening in the job market. I would look for evidence that signs of an overwhelmingly tight labor market were giving way to signs of a more slack labor market. I would look at a wide range of price increases to see if we see a significant fall in inflation in the median price. I would look at the kind of reports the Fed gets on everything from future hotel reservations to business orders to feel like a steep recession was starting to kick in.”
What are the odds that American financial asset prices will stay low for an extended period of time?
Summers: “If you look at asset prices, they seem to take full account of what has happened to real interest rates. I’m not sure the kind of gains that would likely come with a recession when we have one is something that’s fully priced into asset prices at this point.”
Is the economy in for a soft landing or a harder, longer recession?
Kashkari: “I think a soft landing is still possible and we will certainly work very hard to achieve that, but a lot of that is out of our control. Do we get more help on the supply side of the economy or do we fully rebalance the economy to reduce demand and that is being done through the Federal Reserve. If that’s the case then it’s much more likely to be a hard landing. So we will try to get a soft landing, but we will bring inflation back to 2%.”
Summers: “I think a hard landing is a lot more likely than a soft landing. If inflation comes down in two or three years… it’ll probably be in the context of a recession, not a smooth ride. Neel said that if we don’t see a miracle on the supply side or a lot of good news on the supply side, it’s likely to be a hard landing. I think that’s right, and I don’t know what reason there is to think we’re going to get some kind of sudden big increase in productivity.”
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