There's a 70% chance of a US recession thanks to the Fed's fight against inflation and risks of a credit crunch, says Larry Summers
- Larry Summers sees a 70% chance that the US economy will face a recession.
- "I think that puts me at the pessimistic end of the spectrum of opinion," the former Treasury Secretary said.
Former Treasury Secretary Larry Summers has warned there's a 70% chance the US economy will slip into recession.
In an interview with Foreign Policy's Ravi Agrawal, the former Harvard University president discussed a range of topics, including the global economic outlook, the dollar's strength, and the West's handling of Russian sanctions.
"The chance that a recession will have begun this year in the US over the next 12 months is probably about 70 percent," Summers said,
"As I put together the lags associated with monetary policy, the credit crunch risks, the need for continuing action around inflation, the risk of geo-political or other shocks affecting commodities, 70% would be the range that I would be in," he added.
"I think that puts me at the pessimistic end of the spectrum of opinion," the economist continued.
Summers has repeatedly sounded the alarm on recession risks, previously warning that the US is headed for an economic "collision" as the Fed's anti-inflation fight wasn't working as well as hoped. Inflation is still well above the Fed's 2% target, coming in at 5% last month.
However, price pressures have cooled significantly since mid-2022, when inflation hit a 40-year high of 9.1%, as the US central bank increased interest rates at the fastest pace since the 1980s. The Federal Reserve has lifted interest rates to as high as 5% from almost zero 12 months ago.
Traders are pricing in a 64% chance the Fed will raise rates by another 25 basis points at its May meeting, according to the CME FedWatch Tool. Higher interest rates encourage saving over spending, investing, and hiring, but make borrowing more expensive. That can deter consumption, increase unemployment, and cause an economic downturn.
Meanwhile, fears of a credit crunch are on the rise following the collapse of Silicon Valley Bank last month. Like Summers, veteran economist Nouriel Roubini has warned that a pullback in lending could trigger a recession, given it could crimp overall demand.