Summers says U.S. recession probabilities are on the rise

Lawrence Summers, a former Treasury Secretary, said that the likelihood of a recession in the United States is rising after a series of weak economic indicators and that the Federal Reserve is nearing the end of its series of interest-rate increases, as well.

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The current tightening cycle is in its very late innings, which is pretty clear. I think that is a judgment that they should hold off on until the very last kind of moment, regardless of whether there is going to be another move necessary or not," he said of senior Fed policymakers, whose next decision will come on May 3.

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It appeared that Summers discounted Friday's jobs report, which he said reflected the strength of the economy early in the first quarter, which is now less relevant given the prospect of a tightening of credit in the future. There was another solid gain for US payrolls in the coming weeks, with the unemployment rate also keeping pace with the growth in payrolls.

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Contrary to this, purchasing manager surveys released this week showed that manufacturing and service activity slowed more than expected, showing a more significant slowdown in activity than expected. This is the lowest level the ISM has reached since the spring of 2020 for its factory gauge. Other data this week showed that job openings were down this week and that the trend for jobless claims was on an upward trajectory.

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Summers, a Harvard University professor, said there was a sense that credit was being restricted to a significant extent. "The probability of a recession is increasing at this point in time. It's going to be extremely difficult for the Fed to make decisions over the next few months - with very high risks on both sides. "

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The two-sided risks associated with overheating of the economy are the consequence of its overheating, Summers said. With Silicon Valley Bank's collapse last month, Mr. Bernanke has called on the Fed to engage in a broad review of its internal models, which failed to anticipate the spike in inflation that began in 2021 and had failed to capture the emerging risks in the banking system that became apparent.

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"There is a need for the Fed to go through some serious soul searching," Summers said. "Despite the best efforts of the Federal Reserve over the past two and a half years, business as usual has not been successful.”

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There is a lot of work that needs to be done by the US central bank, among other things, he said, including rethinking the process by which savings are converted into lending. There was one key takeaway from the SVB disaster which was that this lender's deposit base was much less sticky than many people had anticipated it would be. It was also a result of this collapse that depositors sought higher returns on their funds in order to compensate for the collapse.

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"Despite the fact that many households have been willing to put their money at risk in order to earn almost nothing on their money, I'm not confident that the current system will continue," Summers told to Trade Algo. "I think the Fed needs to take a very close look at the kind of financial system they want us to move into and do some fundamental reflections on it."