Former Treasury Secretary Lawrence Summers predicted on Sunday that a recession will likely hit the United States within the next two years.
“I think there’s certainly a risk of recession in the next year,” Summers told CNN State of the Union host Dana Bash. “I think given where we’ve gotten to, it’s more likely than not that we’ll have a recession within the next two years.”
His assertion seems to contradict that of current Treasury Secretary Janet Yellen that a recession is not “in the works.” On Thursday, Yellen dismissed talk of an impending recession, saying, “Don’t look to me to announce it.”
She insisted that the fundamentals of the economy are still robust even as inflation continues to surge.
“I’m not going to announce it. I don’t think we’re going to have a recession,” she said. “Consumer spending is very strong. Investment spending is solid. I expect growth to slow down. We have a very strong economy. I know people are very upset — and rightfully so — about inflation. But there’s nothing to suggest inflation if a recession is in the works.”
Summers, who served as Treasury secretary during the Clinton administration and as director of the National Economic Council during the Obama administration, was an early dissenter from the party line (shared by the Fed) that there was little to worry about inflation.
Yellen previously told MSNBC in March 2021 that inflation was unlikely to intensify. “I really don’t think that is going to happen. We had a 3.5 percent unemployment rate before the pandemic and there was no sign of inflation increasing,” she said.
In light of the latest jaw-dropping inflation numbers, with the consumer price index rising 8.6 percent from last year in the highest increase since December 1981, the Federal Reserve has come under renewed criticism for not acting earlier. The question now is whether the pace of tightening on which it is already embarked is going to be enough.
In a recent appearance on Bloomberg Television’s Wall Street Week with David Westin, Summers suggested the Fed will need to resort to dramatic increases in the fed funds rate, in addition to unloading some of its balance sheet, to bring down inflation. Those rate hikes in turn run the risk of popping the financial bubbles that have been born out of the “easy money” era of low rates, triggering an economic crash or even a recession, many economists have agreed.
“My own view is that the Fed and the markets are still not recognizing what’s likely to be necessary,” Summers said. “The market judgment and Fed’s judgment is that you can somehow contain this inflation without rates ever rising above 2.5% in terms of the fed funds rate.”
“What we’re going to find out is what the vulnerability of the economy is to rate increases,” Summers said. “It may be, as some argue, that because of greater levels of debt, because asset prices are substantially inflated, the economy is more vulnerable than usual to rate increases or to quantitative tightening.”