A recession is the most likely outcome for the US

A recession is “the most likely” outcome for the US economy, says Larry Summers

Former Treasury Secretary Larry Summers, whose conflicting views on the risks of prolonged inflation have come true, reiterates his concerns about a possible US downturn: He now says a recession is “the most likely”, partly because the Federal Reserve “must.” keep going [in its effort to subdue inflation] until we see disinflation.”

In an interview with Bloomberg Economics published Thursday, Summers, a paid Bloomberg contributor, said that “the odds of a hard landing within the next two years are certainly better than half and possibly two-thirds or more.” One of the mechanisms that will bring about a recession is the central bank’s response to increased inflation, Summers said, adding that “we won’t see disinflation back toward the target range until we see a significant rise in unemployment.”

See: Treasury Secretary Janet Yellen says it’s not impossible for the Fed to bring about a soft landing for the US economy

The release of Summers’ comments comes just two days after CPI data showed annual headline inflation in the US rose to 8.5% in March, the highest since 1981. The rate has been well above for almost a year the Fed’s 2% target, which puts central bankers under pressure to aggressively raise target interest rates. Expectations of higher interest rates are spreading across the economy, with the average 30-year mortgage rate rising to 5% for the first time in a decade. Meanwhile, financial market participants continue to debate whether inflation has peaked.

“If you look at history, there’s never been a moment where inflation was above 4% and unemployment was below 5% when we didn’t have a recession within the next two years,” Summers said, according to a transcript from Bloomberg. “I don’t think the idea that’s still in the Fed projections – that we could continue to have super-stretched labor markets with 3½% unemployment and we could have a rapid fall in inflation – is terribly plausible.”

In general, economists seem to recognize the potential for a downturn: an April Wall Street Journal poll of economists put the likelihood of a recession in the next 12 months at 28%, up from 13% a year ago.

On Thursday, investors sold Treasuries aggressively as they assessed the future path of inflation, with yields rising across the board. 10-year TMUBMUSD10Y, 2.827% jumped over 2.8%, while major US stock indexes DJIA, -0.33% COMP, -2.14% SPX, -1.21% were mixed.