Former U.S. Treasury Secretary Larry Summers cautioned on Wednesday that President-elect Donald Trump‘s proposed economic policies could trigger more severe inflation than the surge experienced during President Joe Biden‘s term, highlighting potential risks for investors and markets.
What Happened: In an interview with the Financial Times’ Martin Wolf, Summers pointed to Trump’s proposed combination of maintaining tax cuts, implementing broad tariffs, and potential labor force reductions through deportation as key inflationary factors.
“If the program were implemented as described in the campaign, I am very confident that the inflationary impulse would be significantly larger than the impulse represented by the Biden program that was put in place in 2021,” Summers said.
The warning comes as current Treasury Secretary Janet Yellen expressed similar concerns about Trump’s proposed tariffs, suggesting they could “undermine confidence in financial markets” and increase costs for American households.
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Why It Matters: Summers drew parallels to historical precedents, comparing the situation to former President Richard Nixon‘s economic policies in 1971, which included tariff impositions and price controls. He suggested that Trump’s administration might adopt similar populist price control measures.
Nixon, the 37th president from 1969 to 1974, presided over an inflation rate that rose from 6.2% to 12.3% by the end of his term. In contrast, the latest economic data shows the current inflation rate stands at 2.7% as of November.
Despite these risks, U.S. stock markets remain bullish, with the S&P 500 and Dow Jones Industrial Average recently hitting record highs. Summers noted this market confidence might be misplaced.
Scott Bessent, Trump’s economic adviser, and Treasury secretary pick, has attempted to ease market concerns, stating that Trump would support a strong dollar and suggesting that proposed tariffs are merely opening positions for negotiations.
However, Summers emphasized that markets are now “hair-trigger sensitive to inflation,” which could act as a natural check on potentially inflationary policies. “The bond vigilantes will be availing in helping us get to more favorable outcomes on inflation,” he said.
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