Larry Summers warns a recession sparked by a self-fulfilling process is looking more likely now

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Larry Summers
Lawrence Summers.Chip Somodevilla/Getty Images
  • Former Treasury Secretary Larry Summers said a recession could be looming as a self-fulfilling process.

  • He told Bloomberg that the risks of a downturn this year have grown, but it could stem inflation.

  • "The risks of a 2022 recession are significantly higher than I would have judged six or nine weeks ago."

Former Treasury Secretary Larry Summers thinks the chances of a recession this year are rising, and it could set in sooner than anticipated.

"The risks of a 2022 recession are significantly higher than I would have judged six or nine weeks ago," Summers told Bloomberg Television.

He noted that a downturn sparked by a "self-fulfilling process coming out of high inflation and reductions in people's incomes" is appearing more likely.

But it's possible that if a recession hits before the end of the year, it would act to stem inflation. Summers has predicted before that a recession is the only way to bring down the historic inflation rate to the Federal Reserve's 2% target.

He said there's roughly a 50% chance, or "maybe a bit less than that," that GDP shrank in the first two quarters of this year already.

New government data this week revealed that consumers have slowed down purchases as high prices take their toll. Some economists have modified their predictions for economic growth and forecast a potential second consecutive quarterly contraction after the first quarter's dip.

If the US does fall into a recession, Summers predicted the central bank would change their policy approach to be less hawkish. But he remains confident that the Fed will be able to meet its inflation targets.

"It may be more difficult, it may require them to be resolute, but I don't think they're going to be unable to meet their inflation targets," he said.

Meanwhile, Fed Chair Jerome Powell warned on Wednesday that although the US economy is strong, "there's no guarantee" the central bank can raise interest rates sharply to tackle inflation without derailing growth.

"The process is highly likely to involve some pain," he said at a European Central Bank conference in Sintra, Portugal.

Read the original article on Business Insider