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Larry Summers: US Could Get Stuck at Zero Interest Rates in Recession

Former Treasury Secretary Larry Summers (Rob Kim/Getty Images)

Monday, 14 October 2019 03:53 PM

Former Treasury Secretary Larry Summers warns that the U.S. is just one bad recession away from being right back at zero interest rates or even lower.

“It’s a very different world when everyone’s stuck at zero interest rates,” Summers, a critic of President Donald Trump who served as former President Bill Clinton’s Treasury secretary and as an economic adviser for former President Barack Obama, told CNBC.

“We’ll have to think about stabilization policy. Institutions are going to have to think about their investment policy in a very different world when we have a black hole, zero interest rate world,” Summers said.

“I fear that’s what we’re headed into,” the Harvard economics professor warned, pointing to Japan’s economy, which has experienced decades of stagnation, CNBC.com explained.

Without major change in the U.S., Summers predicts there’s little chance of policy rates set by the Federal Reserve staying above zero. “We’re one recession away from a situation of that kind.”

Summers said he sees a recession on the horizon but put the risk of it happening next year below 50%. Those odds go up over the next several years, he added.

Meanwhile, Bloomberg News reported that the chances of a U.S. recession within the next 12 months is now at 27 percent as economic-slowdown fears have grown in recent months amid a persistent trade war with China, pullbacks in corporate hiring and investment and a manufacturing sector that has already slipped into contraction.

The recession probability model developed by Bloomberg economists Eliza Winger, Yelena Shulyatyeva and Andrew Husby incorporates a range of data spanning economic conditions, financial markets and gauges of underlying stress. Some indicators, like the yield curve, are flashing warning signs. Others, like real wage gains, not so much.

Forecasting just when a recession will begin is notoriously difficult, but as a downturn nears, indicators flash clearer warnings. Because different indicators show signs of strain at different points, the heat map below reflects the chance of a recession at various points in time, with each focusing on a different set of indicators.

Many define a recession as two consecutive quarters of negative growth. The official dating committee at the National Bureau of Economic Research takes a more holistic approach, defining a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months.”

Recessions are usually accompanied by a swift increase in the unemployment rate. The jobless rate differs greatly between downturns depending on the breadth and severity of the recession. While unemployment peaked at 10% in 2009, and rose even higher in the early 1980s, other downturns have brought still-painful but smaller increases in the jobless rate.

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Larry Summers: US Could Get Stuck at Zero Interest Rates in Recession
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Monday, 14 October 2019 03:53 PM
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