Inflation isn't likely to come down to Fed's 2% target, two prominent economists say

By Greg Robb

Often polar opposites, Glenn Hubbard and Larry Summers agree there's a bumpy road ahead for the Fed

Two prominent economists, who both were on short lists to run the Federal Reserve, on Tuesday rejected the benign view that inflation would continue to gradually decline to the Federal Reserve's 2% inflation target without causing the economy pain.

"I do think inflation at the moment is stuck well above the Fed's 2% target. We're not at a good level," said Glenn Hubbard, a top economic adviser to President George W. Bush.

Economists who blame a measurement issue with shelter costs for the high inflation are overstating the case, Hubbard said. Even if shelter costs were lower, they would not fall enough to reach 2%, he argued. That's because, at the current level of shelter inflation, all other prices would have to be zero to reach the 2% target, he said.

Larry Summers, a top economic adviser to President Barack Obama, agreed about the troublesome inflation picture.

"I don't think we're on a convincing trajectory to the 2% inflation target," Summers said.

The two economists spoke together on a webcast sponsored by the Economic Club of New York.

Last month, at a forum sponsored by The Hoover Institution at Stanford University, Summers said he never thought the 2% inflation target was a good idea.

He told a panel of economists that, over the next three years, the Fed is going to have to either accept that the U.S. economy runs best at a 2.75%-3% inflation rate, or else they will cause "a fairly serious recession" in pursuit of 2% target, he said.

During Tuesday's program, Hubbard said there will likely be an economic recession in the coming quarters, but it won't be a severe one.

"Planes don't stay in the sky forever. They do land. I expect a relatively soft landing, but a landing it will be," Hubbard said.

Summers said he doesn't think the Fed has much room to lower interest rates. He said a large amount of fiscal spending in the wake of the pandemic has pushed the "neutral" level of interest rates to about 4.5%. That's well above the Fed's current estimate of 2.6% and not far from the Fed's benchmark interest rate level of 5.25%-5.5%.

"That probably means less Fed cutting than is now anticipated," Summers said.

-Greg Robb

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06-04-24 1401ET

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