Former U.S. Treasury Secretary Lawrence Summers said Friday that a surge in U.S. job growth last month is "good news" for now, but it also shows the Federal Reserve's interest rate hikes are not working as they once did, increasing the danger of an economic hard landing.
"Our economy is kind of like Energizer Bunny," he said on one show. But with job growth accelerating, the risk of a hard landing may look a bit greater." Considered one of the most recognizable advertising images of the late 20th century, the Energizer Rabbit was once a symbol of enduring strength, and American politicians to celebrities have used it to beautify themselves.
Data released Friday showed that the U.S. economy added nearly twice as many jobs in September as economists had expected. Payrolls increased by 336,000 after upwardly revised payrolls in the previous two months, though the report also showed a slowdown in wage growth.
"You have to recognize that these are good numbers, but I wouldn't say they guarantee a soft landing," Mr. Summers said. A year and a half ago, the Fed embarked on its most aggressive monetary tightening campaign in decades, raising interest rates by more than 5 percentage points. Summers said the economy's performance suggested some underlying shifts in the effectiveness of Fed policy.
"We may be living in a world where interest rates are no longer the tool that they used to be to guide the economy. That means when markets need to cool down, rates will have to be more volatile than in the past." 'he said.
Summers also warned that given the current sell-off in bond markets, combined with risks from other countries around the world and rising valuations in many markets, including private equity, "I see a lot more financial tinder."
"We have to make sure we are thinking about contingency plans to deal with financial risks," he said. He urged policymakers meeting at a global gathering next week to discuss "contingency measures to deal with the financial crisis".
As for why the U.S. economy might be less sensitive to interest rates, Summers noted that since many homeowners locked in lower mortgage rates in previous years, they are less likely to sell now. That reduces housing inventory, pushes up property values, makes people feel wealthier and helps sustain consumption.
Cause of change
Summers noted that higher interest rates also mean "more money in people's pockets." At the same time, some business investments, such as those in artificial intelligence, take shorter time to implement, making it less sensitive to the level of interest rates.
Summers attributed half of the recent jump in Treasury yields to investors recognizing "what it's going to take to get the economy balanced" given the strong U.S. growth. The so-called neutral level of the Fed's benchmark interest rate, which neither stimulates nor slows economic growth, is now being raised, he said.
The yield on the 10-year Treasury climbed as high as 4.89% after Friday's jobs data, its highest level since before the global financial crisis in 2007. That is about 1 percentage point higher than at the start of the year.
Summers said another key driver of the Treasury sell-off was the imbalance between supply and demand. The federal budget deficit will roughly double by fiscal 2023, forcing the Treasury Department to issue more debt.
In the end, Summers concluded, given the current situation, "I don't think rates are likely to fall as much as markets expect." I wouldn't be surprised if the market adjusts its view further."
He also criticised the Fed and the Treasury for failing to take advantage of low interest rates to extend the maturity of public sector borrowing. While businesses and households are locking in low rates for longer, U.S. financial authorities are actually doing the opposite, he said.