“I still think the Fed and most market participants are underestimating the gravity of our situation,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. 

Fed policy makers, in their outlook released on Wednesday, signaled they see inflation easing from above 6% today to below 3% next year and near 2% in 2024. The median forecast showed unemployment rising to 4.1% by 2024, from 3.6% in May.

Summers said that while the latest predictions mark an “epic” revision from the March outlook, they still look more like an optimistic risk scenario rather than a baseline forecast. 

“A better judgment is that there’s no reduction to normality without a significant increase in unemployment of perhaps 2 percentage points or more at some point down the road,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television.

Summers’s scenario would have the jobless rate going to 5.6% or higher. The median projections of economists surveyed by Bloomberg are for rates below 4% both next year and in 2024.

“I would be very, very surprised if we saw inflation come down to 2.5% without also having seen a recession,” Summers also said. The more likely scenario is that the recession won’t bring consumer-price gains “all the way down” to 2.5%—“that’s why I think the central tendency is towards stagflation.”

Fed Chair Jerome Powell on Wednesday said that policy makers aren’t trying to “induce a recession now,” but that the “pathways” to overcoming inflation while maintaining a strong job market “have become much more challenging due to factors that are not under our control.” He cited continuing fallout from the Russian invasion of Ukraine among the supply-side constraints on the economy.

“I don’t think that the recession that Chair Powell says he’s willing to tolerate necessarily a large enough recession to do what would be necessary with respect to inflation,” Summers said. There remains “very substantial ambiguity” about what the Fed is prepared to do, he said.

The former Treasury chief said that a fresh challenge could emerge in the next month is geopolitical tensions with Iran. That could “feed through into energy markets,” he said.

Summers judged that while the U.S. is going through difficulties now, history shows a record of bouncing back.

President Jimmy Carter declared the nation to be suffering a “crisis of confidence” in 1979 remarks known as the “malaise speech.” But the malaise debate “looked kind of ridiculous several years later,” Summers noted, referring to the economic boom that ignited in the mid-1980s.