Former U.S. Treasury Secretary Larry Summers says there needs to be a surge in unemployment to curb inflation, which Federal Reserve policymakers say doesn’t need to happen for price growth to cool off.
According to Bloomberg News, Summers said in a speech on Monday from London there needs to be a lasting period of an unemployment rise to contain inflation — either, a one year spike to 10%, two years of 7.5% unemployment, or five years of 6% unemployment.
Put a different way, Summers is calling for the unemployed rolls to swell to roughly 16 million from just under 6 million in May.
President Joe Biden said he spoke with Summers on Monday, though he said a U.S. recession can be avoided.
The way Summers framed the numbers suggests he’s talking about what’s known as the Surrender Ratio, which is the link between unemployment and inflation. According to Jason Furman, the former chair of President Obama’s Council of Economics Advisers, in the 25 years before the pandemic, the Sacrifice Ratio has been six percentage points — meaning one year of a 6 percentage point jump in unemployment, or two years of a 3 percentage point increase in the jobless rate, would be required to knock down inflation by a full percentage point.
In May, the unemployment rate was 3.6%. What Summers is basically saying is he wants the unemployment rate to rise to a level that would knock a full percentage point off inflation. The core PCE price index was 4.9% year-over-year in April.
Current Federal Reserve officials don’t accept that there needs to be such a stark trade-off. The Fed’s forecasts call for the unemployment rate to rise to 4.1% next year in a way that would cool core inflation to 2.3%. Christopher Waller, a Fed governor, said the trade-off was less between inflation and unemployment, than between inflation and job openings.
Jerome Powell, the Fed chair, also said such a stark trade-off wasn’t needed. “Take for example in the labor market, so you have two job vacancies essentially for every person actively seeking a job, and that has led to a real imbalance in wage negotiating. You could get to a place where that ratio was at a more normal level and you would expect to see those wage pressures move back down to level where people are still getting healthy wage increases, real wage increases, but at a level that’s consistent with 2% inflation,” Powell said at the last press conference.