Soft landing is not that easy! Summers: The Federal Reserve may face double unexpected events, and there are now many risks.

On Wednesday, the Federal Reserve announced a pause in interest rate hikes, but raised the median expectation for interest rates in the next two years, sending a hawkish signal that high interest rates will be maintained for longer. They also significantly raised this year's GDP growth forecast to 2.1%. Former US Treasury Secretary and economist Summers immediately warned that the Fed is too optimistic about the prospect of a soft landing and that some economic risks are imminent.

The day after the Fed meeting, on Thursday, September 21, Eastern Time, Summers stated:

"The Fed is too optimistic. It is more likely that they will either be surprised by rising inflation or by weakness in the economy, or both, resulting in stagflation."

Summers listed a series of risks facing the US economy:

• The strike by automotive workers organized by the United Auto Workers (UAW), the largest labor union in the United States.
• The government budget deficit is close to 8% of GDP after adjusting for accounting treatment of student loans.
• Rising healthcare insurance costs will put pressure on inflation.
• Consumer spending has shown signs of slowing since the beginning of September due to an increase in loan delinquency rates.
• The reset borrowing costs are higher due to loan and bond extensions by companies.

When the US non-farm payroll report was released on September 1, Wall Street Journal mentioned that Wall Street insiders believed that the Fed's pause in interest rate hikes this month was a stabilizing move. At that time, Summers pointed out that the possibility of avoiding a recession had increased, but attention needed to be paid to inflationary pressures related to the strike.

On Thursday, Summers once again emphasized the impact of labor issues on the economy, stating that organized labor actions over the past year or so have had a significant impact on driving up wages in industries such as automobiles. Due to recent well-known labor conflicts and the possibility of reaching large-scale wage agreements, many workers in various places are expecting substantial wage increases.

Summers believes that labor actions may be a source of wage pressure, which will complicate the inflation situation.

During the press conference after the Fed meeting on Wednesday, Fed Chairman Powell stated that a soft landing is the Fed's primary goal, but the Fed does not consider it as the baseline expectation, and he does not want to rule out the possibility of a soft landing. He also downplayed the importance of the Fed's forecast for the median interest rate, stating that the Fed will "proceed cautiously" in the future.

Summers appreciates Powell's abandonment of "forward guidance" and his readiness to respond flexibly to changes in data and prospects. However, he believes that the Fed's actions in terms of getting rid of the influence of forward guidance are "too slow".