US economy is just one bad recession away from zero rates or worse - Larry Summers

The United States is just one bad recession away from being right back at zero interest rates or even lower, Larry Summers warned on CNBC.

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

“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. The Japanese central bank, the Bank of Japan, embarked on its journey into negative rates in 2016, about two years after the European Central Bank.

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.