The US unemployment rate is 3.5 per cent,well below the rate needed to prevent wage inflation,says Summers.Credit:Bloomberg
“You don’t become a low inflation country with high wage inflation. And wage inflation is looking pretty high in the United States,” he said.
According to Summers,the US needs to get to a neutral unemployment rate of well above 5 per cent,from 3.5 per cent currently,to reduce wage pressures as an inflationary component.
“That’s why it’s been my judgment that a recession is an almost inevitable concomitant of a path in which we achieved substantial disinflation,” he said.
He flagged that interest rates might need to go higher than the projected 4.5 per cent peak this year that the market is factoring in. Summers noted that even the highly regarded former chairman of the US Federal Reserve Paul Volker was forced to raise rates more harshly to crush inflation in the early 1980s.
“My own best guess is that if we’re going to bring inflation down sufficiently,and if we’re going to achieve credibility with respect to inflation,rates are going to have to rise somewhat more than what’s currently priced into the market.”
The US Fed will release the minutes from its most recent meeting on Wednesday US time,with Citi economists saying the “hawkish/dovish read of the minutes will likely come down to how much Fed officials discussed eventually pausing or stopping rate hikes”.