Joseph Zeballos-Roig, Quartz Washington: The U.S. economy has been surprisingly resilient in the face of Trump's tariffs. Are you worried about a recession at this point? And feel free to cite a
statistic that you think hasn't gotten enough attention lately.
Larry Summers: “I think it's very difficult to read the economy right now. I am, if anything, a bit more worried about inflation than I am about recession, given the strength of most categories of consumption spending, most categories of business investment and the relatively expansionary posture of
monetary and fiscal policy and some signs of rising inflation expectations. I think the greater risks are on that side.
“I certainly see that the labor market is weakening. But some of that has to do with reduced labor supply associated with border policies, rather than reduced labor demand. I do think that the economy has proven more resilient with respect to tariff policies and other unusual government interventions in the economy,
such as Fed bashing-and taking shares in individual companies than I would have expected.
“I attribute the ‘better than I would have expected’ performance to three things. First, experience, particularly in Latin America, suggests that populist policies often have relatively good outcomes in the very short run, even as they portend very poor long term outcomes. Second, there is an increased sense that in the face of sharp market
reactions, policies will be reversed. Third, any policy headwinds are being offset by tailwinds coming from greater optimism about technology, particularly artificial intelligence.”
Quartz Washington: Going back to the earlier part of your response — you're more worried about inflation and in the short term. How do you think Jerome Powell and the Fed are doing in
balancing the risk between a softening labor market and rising inflation? Should they have waited to lower interest rates?
Summers: “A few years ago, I had a very strong view that the Fed was way behind the curve on inflation in 2021. Any view I have today is much less strong and definitive. I do think that the Fed is tilting more towards easing than would be my
instinct, given the balance of risks — in part because I believe that the neutral interest rate is closer to 4%. So I am not bought into the idea that monetary policy at current rates is meaningfully restrictive.
“My view is supported by the fact that most financial conditions indicators are flashing pretty bright green.”
Quartz Washington: Continuing on that theme of monetary policy, you signed on to the amicus brief defending Fed independence not long ago with three former Fed chairs and many other bipartisan economic officials. Can we expect to see more instances of collective action like that in the weeks and months ahead?
Summers: “I think that was a judgment. That amicus brief came together because of a widely shared concern about a particular issue that was before the Supreme Court. There's certainly no ongoing coalition with plans to make more statements. But I'm sure as events develop, people will consider what's best to do.”
Quartz Washington: Fed independence is basically a sacrosanct thing in the U.S. economy. And I'm wondering if more business leaders should step out and defend the Fed? Citadel CEO Ken Griffin wrote a WSJ op-ed last month. But other than that, it's been pretty muted from the business community.
Summers:
“Every business leader has to make their own judgments. I do think that our business community has a strong interest in policies being carried out within a broad American tradition of respect for law and depoliticization of economic policies, whether those be Federal Reserve policies, regulatory, or other policies. I think it would be helpful If more people in the business community were to recognize the possible dangers of nationalist populist economics of the Latin American
variety, to which we seem increasingly prone.”
Quartz Washington: As someone who is of Latin American descent — my family is Peruvian — I've been very intrigued by your answers recently that you're worried about the nationalist, populist policies of Latin America, creeping into the United States. I know you've mentioned Peronism in the past, the dangers of
Peronism in the U.S.
Summers: “For much of my career, I have been commenting on how important it would be, and how valuable it would be, if Latin American countries became more like the United States in terms of having secure transfers of power at elections, independent judiciaries, fiscally prudent budget policies, independent central banks, economies
[relatively] open to the rest of the world. Policies based on open capitalism and open markets rather than crony capitalism and open societies where dissent is not punished by legal authorities.
“I've always felt that Latin America would prosper more if it evolved in those directions. And until quite recently, I had not really contemplated the possibility of convergence in the other direction, with the United States becoming
more like Latin America. That is, to my mind, a troubling prospect, made more troubling by the fact that the United States, unlike any of the countries in Latin America, is a superpower with major global responsibilities.”
Quartz Washington: Gold hit record highs this past week. What does that tell us about the status of the dollar and investors' confidence in the
U.S.? Might we be entering a post-dollar era where U.S. currency no longer reigns supreme?
Summers: “The dollar value is defined relative to other currencies. While we certainly have our enormous number of challenges, we also have some very strong fundamentals that make us an attractive place to invest capital. Major alternatives to the dollar, like the euro, the
yen, and the Chinese renminbi have very serious challenges as well. I think it's probably a good idea to think of the strength of gold as commentary on the dollar and more a commentary on very broad concerns about political intrusion in economies.”
Quartz Washington: Companies have made enormous investments in AI this year, and the ensuing AI spending boom has
fueled anxiety about a bubble that will pop sooner or later. Are we experiencing a situation comparable to the dotcom bust of the early 2000s?
Summers: “I think every investor will have to make their own judgment about how to think about analogies with the 1990s. There are certainly arguments that would suggest that. But one could also make arguments suggesting
that we're currently in a place like we were in in 1997, when expansion had substantial room to run and when there was substantial market appreciation yet to happen.
“It's noteworthy that we're in a quite rare confluence, the circumstance where earnings are rising quite rapidly and interest rates are falling. So I am sure we have not seen the last technological bubble. But whether we are near the end of an expansion or one that has
some substantial room to run is not a judgment I'm prepared to make with any definiteness. In general, I would advise people against attempting to time markets.”
—Joseph Zeballos-Roig
Joseph Zeballos-Roig is Quartz’s Washington Correspondent. Email him at jzeballos-roig@qz.com and follow him on X at @josephzeballos.
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