After a nearly yearlong campaign against inflation that helped tank markets in 2022, Federal Reserve Chairman Jerome Powell uttered the one word investors wanted to hear more than anything during his press conference last weekdisinflationand they ignored pretty much everything else he said after that. The bullish news from the Fed, at least in the minds of many investors, along with a stronger than expected jobs report, has helped the stock market continue marching higher in the days since.
The S&P 500 is now up nearly 8% year to date, and the tech-heavy Nasdaq has jumped over 14% as investors return to the growth stocks that led markets during the pandemic, hoping a new bull market is forming as A.I. tech evolves and inflation fades. But former Treasury Secretary Larry Summers is worried the euphoria is misplaced.
I think the consensus has become substantially too complacent about inflation, he said in a Friday interview with Bloomberg. I dont think its a moment for any kind of euphoriaWere headed into whats likely to be a turbulent period.
Summers argued that inflation is still at levels that would have been unimaginable two years ago, and bounce-back factorsincluding rebounding wholesale used car and gasoline pricescould make it more difficult to tame than some imagine.
George Ball, chairman of the investment firm Sanders Morris Harris, told Fortune that the rally in stocks this year has also been disconnected from the economic backdrop and largely fueled by retail investors buying speculative stocks that had been crushed in 2022.
The current market strength is ignoring the Federal Reserves signals that higher for longer interest rates is the new normal, he added.
While Fed Chair Powell did mention disinflation last week, he also doubled down on his intention to fight inflation with interest rate hikes.
The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more than is now expected, he told the Economic Club of Washington.
Year-over-year inflation, as measured by the consumer price index (CPI), dropped from its 9.1% June peak to 6.5% in December, but Summers said he still fears the Feds 2% target will be difficult to hitand that means the next monthly CPI report on Tuesday will be critical for investors.
Tomorrows CPI number will be a first reading on whether there has been complacency about inflation, he explained in a Monday tweet. I am not sure we are on a trajectory to get us to 2% inflation without more rate increases than the market is now anticipating.
Summers has repeatedly warned in recent months that Fed officials need to stay the course with interest rate hikes until there is proof that inflation is under control. Ever the fan of analogies, he compared on Friday their inflation fight with scoring in football.
Its easier to move the ball down the field at midfield than it is when youre in the red zone, he said, referring to the final 20 yards of the field, where the offense has less room to operate and defenses get more aggressive. And were getting closer to the red zone with respect to inflation.
Beyond concerns about persistent inflation, Summers warned last week that the economy could face a sudden crashwhich he labeled a Wile E. Coyote momentas consumers spend down their pandemic savings, businesses cut costs, and geopolitical uncertainty rises.
I think the economy is going to slow and inflation is going to come downbut I still think the risks are very large that we either dont get inflation down durably or the economy tips into recession, he said.
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