Former Treasury Secretary Larry Summers has cautioned against excessive optimism, suggesting there’s a risk that the U.S. may struggle to manage inflation without steering towards an economic downturn, Bloomberg reported.

Summers noted that the Federal Reserve may need to increase interest rates further.

“It’s a very narrow window to achieve that soft landing,” Summers commented.

Summers proposed three potential scenarios: a soft landing, a “no landing” scenario with inflation remaining above 3%, and a harder landing where the cumulative impact of rate increases hits the economy. Each scenario has roughly a one-in-three chance of occurring.

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Summers, also a Harvard University professor, warned investors to be cautious, especially concerning the stock market. He suggested some assets may be “priced a bit for perfection.”

He further added that traders may not be fully considering another potential 25 basis-point rate increase by year-end. This caution comes in light of data indicating a rise in the core consumer price index, exceeding forecasts.

Summers also warned against the assumption that the Federal Reserve will need to lower rates if inflation decreases. He believes that current inflation issues predominantly affect the service sector, and easing price increases there won’t have much of a contractionary impact on spending.

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Photo by Brookings Institution on Flickr