The risk of a U.S. recession is rising as shifts in monetary and immigration policies amplify economic uncertainty, according to Harvard professor and former World Bank chief economist Carmen Reinhart. In a recent interview with the media, Reinhart emphasized that the current environment of volatile financial markets and elevated interest rates is exposing the U.S. economy to increased vulnerability.
She attributed this to growing policy unpredictability, spanning US tariffs, central bank independence, and rising geopolitical tensions. Reinhart warned that restrictive immigration measures and efforts to revive domestic manufacturing could hinder population growth and, consequently, economic expansion. “We shouldn’t be overly confident that a lot of the manufacturing that left will ever return,” Reinhart noted, cautioning that retreating from globalization may stifle productivity and deepen economic fragmentation.
She advised businesses and investors to focus on hedging and adopt medium- to long-term strategies to mitigate potential downturns. Echoing Reinhart’s concerns, Moody’s Analytics chief economist Mark Zandi described the U.S. economy as being “on the precipice of recession.” In a social media post, Zandi pointed to stagnating consumer spending, contracting construction and manufacturing sectors, and a labor market under pressure.
Rising policy uncertainty increases recession risk in U.S. economy
He attributed these trends to higher tariffs and stricter immigration controls, which are squeezing corporate profits and diminishing the labor force. Zandi explained that while the official unemployment rate remains low, this is masking a broader decline in workforce participation. He cited a shrinking foreign-born workforce and an economy-wide hiring freeze that is disproportionately affecting new entrants into the job market.
Revised employment data revealed a significant downward correction to job growth figures for May and June, underscoring the labor market’s underlying weakness. The Federal Reserve, meanwhile, has maintained its benchmark interest rate unchanged for five consecutive meetings, citing persistent inflationary pressures and heightened economic uncertainty.
Economists urge investors to brace for prolonged economic turbulence
Despite political pressure to lower rates, Fed Chair Jerome Powell stressed the central bank’s commitment to balancing its dual mandate of promoting employment and controlling inflation. Economic indicators remain mixed. While gross domestic product expanded by 3% in the second quarter of 2025, July’s job creation fell short of expectations, with just 73,000 new positions added.
This divergence has raised questions about the sustainability of growth, particularly as businesses adjust operations in response to tariffs and shifting supply chains. Prediction markets, such as Kalshi, have lowered the probability of a U.S. recession to 14%, down from 70% in May. However, economists caution that traditional warning signs, including an inverted yield curve and widening credit spreads, still merit attention.
Joel Kan, deputy chief economist at the Mortgage Bankers Association, expects the unemployment rate to rise above 4.5% by year-end, driven by ongoing labor market softening and contracting goods-producing industries. While positive GDP figures provide a temporary cushion, analysts agree that the combined impact of restrictive trade and immigration policies could weigh heavily on future economic prospects. – By Content Syndication Services.