FX News Today, a series of risks are hanging over! Former US Treasury Secretary warns that the Federal Reserve may be too optimistic

Sept. 22 - Former U.S. Treasury Secretary Lawrence Henry Summers says Federal Reserve policymakers are overly optimistic about its latest economic forecasts, warning the central bank that it risks being taken aback by faster inflation and lower growth.

Lawrence Henry Summers, the former US Treasury secretary, said Federal Reserve policymakers were overly optimistic about its latest economic forecasts, warning the central bank risked being taken aback by faster inflation and lower growth.

"The Fed is pretty optimistic," Mr. Summers said. "They are more likely to be surprised by inflation, or weak growth, or both - a stagflationary dynamic," he said.

Fed policymakers raised their growth forecasts for this year and next in their latest forecasts. They also downgraded their estimates for core inflation this year, which strips out food and energy costs and is forecast at 2.6 per cent by the end of 2024 - not far from their 2 per cent target.

Although Jerome Powell, chairperson of the Federal Reserve, said at a press conference that a soft landing was not his base case and that he "did not want to predict its likelihood", he also played down the importance of policymakers' median forecasts. After leaving interest rates unchanged on Wednesday, he said the Fed would move forward "cautiously".

Mr. Summers praised Mr. Powell for abandoning "forward guidance" and being prepared to respond flexibly to developments in the data and outlook, but said the Fed was "moving too slowly" to wind down its forthcoming actions.

Fed officials, in their updated forecasts, expect another rate hike before the end of the year and two cuts in 2024. "They are more likely to need to raise rates than they are now forecasting a cut, but the risks are entirely two-way," Mr. Summers said.

Economists have been postponing or abandoning their predictions of a U.S. recession for months as price and wage gains slow and growth remains firm. Goldman Sachs said earlier this month it now sees the possibility of a recession.

"People may be overly optimistic right now, and I think the Fed has fallen into that optimism," Summers said. "It's a good idea to be conservative and perform well."

The former finance minister enumerated the challenges facing the economyA series of risks：

The United Auto Workers union strikes against automakers.

Taking into account student loans, the fiscal deficit is close to 8% of GDP.

Health insurance costs are likely to rise, putting pressure on inflation.

Since Labor Day, there have been signs of a slowdown in consumer spending, and loan delinquencies have risen.

The resetting of borrowing costs after corporate loans and bonds mature.

Summers emphasized the importance of organized labor's efforts to secure significant wage increases in the automotive and other industries over the past year or so.

"A lot of the things that explain economic development over the last few decades can be attributed to changes in labor power," Mr. Summers said, noting that in 1981, when President Ronald Reagan fired air traffic controllers who demanded pay increases, it had a "big impact" on the psychology of engagement between workers and employers.

Now, with the recent "high-profile labor conflicts" and the possibility of a massive wage increase agreement, "this is going to give workers in a lot of places some big ideas." "What we need to be aware of is that these various union dynamics can create pay pressures," he said, which "complicates the inflation issue."

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Lawrence Henry ("Larry") Summers (born November 30, 1954) is an American economist and director of the National Economic Council. He served as the 71st US Treasury Secretary during the Clinton administration. He was president of Harvard University from 2001 to 2006. From 2009 to 2011, he headed the National Economic Council (NEC) and became the chief architect of Obama's economic policy. He received the John Bates Clark Award for his research on macroeconomics.