The most recent numbers released in January by the U.S. Bureau of Labor Statistics, said seasonally adjusted compensation costs for civilian workers increased by 1% in the three months ended Dec. 31.
While he said he would rather wait until that number is announced to predict how much the Federal Open Market Committee will raise the federal funds rate at its upcoming May 2-3 meeting, Mr. Summers said, "My guess is that the right thing for the Fed to do is to raise rates by 25 basis points, because that's what they've been signaling and if they don't do it, they run the risk of looking panicked by the current (credit crunch) situation."
Mr. Summers then criticized the Fed for setting a 2% inflation goal as the justification for its actions in raising rates.
"I would've not pinned it down so precisely because your credibility becomes invested in it," Mr. Summers said. "People always want clarity, they always want numbers (and) they walk away feeling better in the short term. But they always remember what you said. People are going to remember (goals) three months later and they're going to be wrong, so it's ultimately better for credibility and for confidence not to overdo the specificity."
In referring to the current inflationary environment, Mr. Summers said, "Look, it was easy two and a half years ago we had an economy that was short of its potential by about $30 billion a month and we injected about $180 billion a month."
At the same time, Mr. Summers said, the Fed was buying $150 billion a month and forecast that the federal funds rate was going to remain at zero until 2024.
"The bathtub was going to overflow, and overflow the bathtub is what it did and that manifested itself into inflation," he said.
"Forecasting inflation going forward is harder. My core read of the situation is not that optimistic. My core read is that we turned ourselves from a 2% inflation country into about a 5% inflation country."
That is where the country is still right now, Mr. Summers said, looking at the wage inflation measures and the very tight labor market.
"So I think we're going to have difficulty getting near the 2% inflation target until or unless the economy slows down fairly substantially."
And a soft landing is unlikely, he said.
"Samuel Johnson famously said that second marriage is the triumph of hope over experience. Whether that's right or not, I would submit that soft landings are the triumphs of hope over experience."