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Investing.com -- Former Treasury Secretary Lawrence Summers has warned of a near 50% chance of the US entering a recession this year. He attributes this to various policy actions by the Trump administration that are eroding confidence. In an interview on Bloomberg Television’s Wall Street Week with David Westin, Summers highlighted the problem of growing uncertainty and predicted a definite economic slowdown.
According to Summers, major immigration restrictions, federal government layoffs, and the impact of President Donald Trump’s tariffs on US competitiveness have drastically altered the nation’s economic outlook. He urged Federal Reserve policymakers, who are meeting next week, to acknowledge the significant toll that uncertainty is taking on the economy and to realize their limited capacity to respond to this uncertainty.
President Trump has already imposed a 20% surtax on Chinese imports since his inauguration in January. He is also planning a series of "reciprocal" duties on trading partners, set to be announced on April 2. Further tariff increases on steel and aluminum are expected on Wednesday.
Despite the Trump administration’s admission that its policies may initially disturb the economy, it believes this will lead to a transition towards growth driven by the private sector and domestic manufacturing, rather than federal spending. Summers, however, expressed skepticism about this "transition period," comparing it to the Biden administration’s dismissal of the 2021 inflation surge as a temporary phenomenon.
Summers also criticized the proposed tariff plans, arguing that they would be counterproductive even for those who support protectionism, as they would increase the cost of inputs needed by American factories. He suggested that subsidizing outputs would be a more effective strategy.
Drawing on Latin American economic history, Summers pointed out the potential dangers of protectionism. He said that while its impacts can vary in the short term, it is typically harmful in the medium to long term. Unless there is a change in policy, Summers anticipates the situation will worsen.
Summers also cautioned that Federal Reserve interest rate cuts may have little effect on bolstering growth if business uncertainty regarding economic policies and household fears over issues such as Social Security benefits and the development of new medicines persist. He emphasized that in an environment of such uncertainty, the exact level of the interest rate becomes less relevant to investment decisions.
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