Former Treasury Secretary Larry Summers, now a Harvard professor, warns that the next recession could hit the nation before officials can do anything to prevent it amid expectations that the Federal Reserve will raise interest rates next week.
“No postwar recession has been predicted a year ahead by the Fed, the administration or the consensus forecast,” Summers, who also was an economic adviser to President Barack Obama and served as Treasury secretary under Bill Clinton, wrote for the Washington Post.
“The chances are very high that recession will come before there is room to cut rates enough to offset it,” he wrote.
Whatever the Federal Reserve does next week, “the unresolved question that will hang over the economy is how policy can delay and ultimately contain the next recession,” he writes.
“The experience of the U.S. and others suggests that once a recovery is mature the odds of it ending within two years are about half and of it ending in less than three years over two-thirds,” he wrote.
“Because normal growth is now below 2 percent rather than near 3 percent, as has been the case historically, the risk may even be greater now,” he wrote.
“The Fed will in all likelihood lift rates this month. Markets will focus on the pace of the Fed’s tightening. I hope and expect that their response will involve no great turbulence. But the unresolved question that will hang over the economy is how policy can delay and ultimately contain the next recession. It demands urgent attention from fiscal as well as monetary policymakers.”
The U.S. Labor Department reported on Friday that employment increased at a healthy pace in November, in another sign of the economy's resilience, and will most likely be followed by the first Federal Reserve interest rate rise in a decade later this month.
To be sure, traders are wagering that the Fed will manage no more than two further hikes before the end of 2016.
That would be less than half the pace the last time the Fed tightened monetary policy.
"While this report can help justify a rate hike in December, it can't justify anything more than a very gradual path of rate hikes," Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management, told Reuters.
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