- Without major change in the U.S., Summers predicts, there is little chance of Fed policy rates staying above zero.
- The European Central Bank and the Bank of Japan first went into negative rates in 2014 and 2016, respectively.
- "I fear that's what we're headed into" in the U.S., warns the former Treasury secretary.
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 on Monday.
"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 on "Squawk on the Street."
"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.
The Fed this year has twice cut rates by a quarter point — as concerns of a global economic downturn, slowing the U.S. economy, intensify. The market expects at least one more Fed rate cut before 2020.
Trump has repeatedly bashed the Fed for not reducing borrowing costs even further. In a tweet last month, the president called Fed Chairman Jerome Powell and the other central bankers "boneheads."
"The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term," he said.
According to the minutes of their September meeting, released last week, some Fed policymakers expressed concern last month that markets are expecting more rate cuts than the central bank intends to deliver.
The Federal Open Market Committee approved a quarter-point rate cut at the Sept. 17-18 meeting, putting the overnight funds rate in a target range of 1.75% to 2%. The July cut by the same amount was the first reduction in rates in more than a decade.
"I do not think we'd be looking at using negative rates," Powell told reporters, following last month's FOMC meeting. They are meeting again at the end of October.
Before this year's cuts, the Fed raised rates nine times — four of them in 2018 alone — since the funds rate was lowered to a target range of 0% to 0.25% in December 2008. Central bankers cut rates 10 times in 2007 and 2008 and embarked on other stimulative measures to boost the economy as the financial crisis took hold.
— Reuters contributed to this report.