Former Treasury Secretary Larry Summers warned on Thursday that President Donald Trump‘s tariff policies are creating a “self-inflicted wound” on the U.S. economy, pushing inflation up while threatening growth.
What Happened: “We should be focused on the fact that we had a shock that pushed inflation up and growth down. That’s a bad supply shock, a self-inflicted wound,” Summers wrote on X. “It tells us that policy is moving in the wrong direction. It’s a shot against the bow of the Donald Trump tariff policies.”
Summers highlighted that the Federal Reserve now views the economic landscape as “more uncertain and more problematic” for achieving its dual mandate of stable prices and maximum employment. His comments come as the central bank held interest rates steady at 4.25%-4.5% while maintaining a forecast of two potential rate cuts in 2025.
Why It Matters: The tariff situation has revived debate over inflation expectations. Fed Chair Jerome Powell described potential tariff-driven inflation as “transitory” – a term that drew criticism from senior economist Mohamed El-Erian, who called it a “big policy mistake” reminiscent of the Fed’s misjudgment in the early 2020s.
“I would have thought that, particularly after the big policy mistake of earlier this decade and given all the current uncertainties, some Fed officials would show greater humility,” El-Erian said, noting businesses and consumers still remember the recent period of “high unanticipated inflation.”
This comes as economist David Rosenberg warned of a potential recession as early as July, pointing to the Fed’s projected 4.4% unemployment rate for 2025 – a significant increase from the cycle low of 3.4% seen in April 2023.
Meanwhile, the Organisation for Economic Co-operation and Development has slashed North America’s growth forecasts, projecting Mexico could face a 1.3% economic contraction while Canada’s growth may slow sharply to 0.7%. The organization cited escalating tariffs, persistent inflation, and policy uncertainty as key factors threatening regional economic stability.
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