The September jobs report showed that inflation was still not under control, according to former Treasury Secretary Larry Summers, who warned on Friday that the economy was likely “headed for a collision of some kind.”
A looming recession has been weighing on markets all year, as the central bank scrambles to hike rates and bring down soaring inflation. After seeing prices hold high despite three aggressive rate hikes this year, Powell took on a more hawkish tone and said the Fed would now try for a “softish” landing – a sign that recession risks are growing as the central bank struggles to cool the economy down.
The economy is still running hot though, demonstrated by last week’s non-farm payroll report that showed the US added 263,000 jobs in September, ahead of economists’ expectations for 250,000.
And while wages looked like they were on a decline, that’s distorted by the fact that there are more workers flooding into low-wage jobs, such as in the leisure and hospitality industries, Summers said in an interview with Bloomberg on Friday.
Summers noted that September’s core inflation rate, which clocked in below headline inflation at 7%, looked “artificially good,” but core inflation was still rising overall, as the core rate is above the quarterly rate of inflation, which is above the half-year rate of inflation, which is above the yearly rate of inflation, Summers siad.
“We’ve got an economy that is too strong that is too strong to be an economy where inflation is going down,” he said. “I think we are headed for a collision of some kind or other, and we’ve just got to manage that collision carefully. And I think the sooner we start managing for some slowdown, the better we’re going to do.”
Summers’s comments speak to the conundrum facing the Fed, as it hikes rates to bring inflation down but at the expense of an economy that by other measures is running strong. The former Treasury secretary has previously noted that it will take unemployment reaching 6% to beat inflation, and that the Fed may need to hike rates above 5%.
Other experts have also warned of an imminent crash. “Bond King” Jeffrey Gundlach has said stocks could plunge by 20% due to growing risk of the Fed causing deflation, and Scott Minerd warned that a sell-off could happen as soon as mid-October as a recession becomes more likely.