[Comprehensive] 'Inflation Warning' Summers Was Right, Recession Too?...Biden Ultimately Seeks Out Summers

[Asia Economy New York=Special Correspondent Joselgina] "Summers was right about the inflation warning. What about the recession?"

As the debate over a recession heats up in the United States, President Joe Biden turned to former Treasury Secretary Larry Summers instead of the current economic chief, Treasury Secretary Janet Yellen. Summers accurately predicted last year that inflation would be a bigger problem when Federal Reserve (Fed) Chair Jerome Powell and Secretary Yellen underestimated inflation as a temporary phenomenon. Recently, he also warned that the U.S. could face a recession within 1 to 2 years.

◇ Biden Turns to Former Treasury Secretary

According to the U.S. political media outlet The Hill, on the 20th (local time), President Biden met with reporters at Rehoboth Beach, Delaware, and when asked about the possibility of a U.S. recession, he said, "I spoke with former Secretary Summers this morning," adding, "there’s nothing inevitable about a recession."

This is a kind of public rebuttal to Summers’ recent warning that "a recession will occur within 1 to 2 years." It aligns with recent statements from senior administration officials suggesting that a recession can be avoided. However, the fact that President Biden specifically mentioned Summers and disclosed the conversation is also interpreted as evidence that he is deeply concerned about the possibility of a recession.

In particular, this call took place amid a heated debate over recession in the U.S. With the midterm elections coming up in November, President Biden cannot help but worry that mentioning a recession could worsen the economic sentiment among economic actors. It is presumed that during this call, President Biden asked Summers to moderate the tone of his recession remarks considering economic sentiment, while also seeking economic diagnosis and advice from him.

Secretary Yellen, who lost market trust due to incorrect diagnosis, contrasts with former Secretary Summers, whose predictions have so far been accurate.

In February last year, Summers expressed concerns in a Washington Post (WP) op-ed that the Biden administration’s stimulus measures could trigger "unprecedented inflationary pressures." In May last year, he criticized the Fed’s view that inflation was ‘transitory’ as overly complacent and argued for immediate tightening. Recently, he warned that U.S. inflation resembles that of the 1970s following the oil shock.

◇ ‘Economic Chief’ Yellen Loses Face

Yellen, who has publicly rebutted Summers’ repeated warnings, has lost face. The fact that President Biden turned to Summers, who was the economic chief during the Bill Clinton administration, reveals Yellen’s narrowed position as the current economic chief.

After Summers’ WP op-ed last year, Yellen downplayed the inflation risk, saying it was "not a major risk" and that "we have the tools to deal with it." She dismissed Summers’ warning that "if you pour too much water into the bathtub, it will start to overflow" as a "small risk and manageable level." However, this year she admitted her mistake, saying "my judgment was wrong." Local media recently reported that "President Biden owes an apology to former Secretary Summers."

During this call, Summers likely conveyed to President Biden concerns about a recession and the need for strong tightening. In a speech held in London, UK, on the same day, Summers stated that to curb U.S. inflation, the unemployment rate must rise above 5%. Ultimately, the challenge currently facing the Fed is similar to what former Chair Paul Volcker faced in the 1970s. He reiterated, "The U.S. needs the strong tightening that Volcker implemented in the late 1970s to early 1980s."

Meanwhile, James Bullard, president of the Federal Reserve Bank of St. Louis and a representative ‘hawk,’ also said that U.S. inflation is similar to the 1970s level and that the Fed must continue a tightening path that meets market expectations. He predicted that the U.S. economy will continue to expand this year.