Steve Hanke Forecasts US Recession and Urges Policy Shift – Here’s Why

The United States is showing strong signs of an imminent recession. According to Steve Hanke, Professor of Applied Economics at Johns Hopkins University, it will arrive by the end of this year.

The former Reagan advisor argues that, though inflation levels are low, the regime uncertainty caused by current tariff policies is spooking investment. The current version of the Trump budget bill would aggravate the fiscal deficit. Paired with insufficient growth in the monetary supply and the already weak labor market, it would worsen US economic prospects. 

Economic Slowdown on the Horizon

Alarming economic indicators continue to surface regarding the health of the United States economy. The Organisation for Economic Co-operation and Development (OECD) recently reported that global economic prospects are weakening.

The United States’ numbers caused significant alarm. The OECD expects its GDP growth to slow from 2.8% this year to 1.5% in 2026. Hanke predicts the number will be lower. 

According to him, the underlying economic challenges are multi-faceted and have been developing for years. Hanke further believes that certain economic policies from the Trump administration and the Federal Reserve will either exacerbate the current situation or prove insufficient to change the US’s financial trajectory.

How do Trump’s Unpredictable Trade Policies Undermine the Economy?

Trump’s inconsistent and unpredictable approach to tariff policy—often involving changing stances on their application and followed by reversals—is a primary factor contributing to the United States’ weakening economic prospects.

“The fact that he’s gone on kind of a, shall we say, tariff tantrum, is a big thing that causes economic growth to slow down,” Hanke told BeInCrypto.

Fundamentally, tariffs on imported goods are equivalent to taxes on international transactions. Though global trade is inherently a win-win situation for both the buyer and the seller, by imposing tariffs, this disruption ultimately harms the United States’ economy.

“What does the tax do? It rips part of that surplus out of the market, takes it, and puts it in the government treasury. As a result, you have fewer transactions. If you tax something, you get less of it, to make a long story short. So international trade will slow down,” Hanke added.

In the meantime, the situation will also spook investor confidence.

The Impact of Policy Instability on Market Confidence

In Hanke’s words, the current administration’s unpredictable approach to policy creates “regime uncertainty.”

“There’s so many things that the Trump administration [is] changing or threatening to change, and they are also changing their mind all the time… you don’t know exactly the degree to which they’re changing things because they bob and weave back and forth,” he explained.

Seeking market calm, investors withhold crucial investments.

“When you have that, investors that are investing in, let’s say, a new factory or something, hunker down and say, ‘well, we’re going to wait and let the dust settle to see what’s going to happen.’ They stop investing,” Hanke added.

This regime uncertainty has also affected the bond market. Over the past two months, it has experienced a surprising sell-off, notably at odds with the current stable inflation rates.

Adding to policy unpredictability, an aggravated fiscal deficit is now a critical headwind for the US economy, raising concerns among investors and the political opposition.

Trump Reconciliation Bill to Worsen Fiscal Deficit Crisis

According to the Bipartisan Policy Center, the federal government’s fiscal deficit reached $1.1 trillion by April 2025, a 13% increase from last year.

The federal fiscal deficit hit $1.1 trillion in April 2025, a 13% increase from last year. Source: Bipartisan Policy Center.

More alarmingly, these heightened rates further inflate the United States’s already $36 trillion national debt. Despite these concerning numbers, if passed, the latest version of Trump’s One Big Beautiful Bill will only add to the existing deficit rather than cut it down.

“Trump is what I call a fiscal nincompoop. He doesn’t pay any attention to the deficit levels… We have a budget that is carrying with it a huge debt load, and the markets are focusing on that. So that’s part of the regime uncertainty. What is going to happen with the federal government’s budget? That’s part of what’s going on,” Hanke told BeInCrypto.

Beyond fiscal concerns, the Federal Reserve’s monetary policy also plays a crucial role in the economic outlook.

Will Interest Rate Cuts Be Enough to Avert Economic Downturn?

Hanke believes that as the economy slows and the labor market weakens, the Federal Reserve will become less hawkish and reduce interest rates. 

While some financial market and Wall Street forecasters anticipate two rate cuts by year-end, he estimates there will be more aggressive cuts. Basing his prediction on the federal funds futures market, Hanke foresees these reductions, likely ranging from 50 to 150 basis points, as early as September.

“We had a very weak labor market report [recently], and the Federal Reserve keeps its eye on the labor market. That’s a key thing. So as the economy slows down and the labor market gets weaker, the Fed will become more dovish,” Hanke said.

However, he also emphasized that focusing solely on interest rates is a misguided approach for the central bank.

Reassessing Monetary Policy

Hanke described Chairman Powell’s focus on interest rates as a “misguided approach.” Instead, the real determinant of economic activity and the key to effective monetary policy lies in the money supply. 

“The big problem is that the Fed does not pay attention to the growth rate and the money supply. They contend that there’s not much of a connection between changes in the money supply and changes in economic activity, which is false,” he said, adding, “It’s like fuel for the economy. If you slow the fuel down going into an engine, the engine slows down.”

He believes that by allowing the money supply to grow appropriately from the current 4.1% growth to his golden growth target of 6&, the Fed can provide the necessary “fuel” for economic expansion, steering the US away from a looming recession.

“The Fed is still engaged in what they call quantitative tightening– shrinking its balance sheet and reducing the rate of increase in its contribution to the money supply… what the Fed should do is drop quantitative tightening completely and increase the rate of growth,” Hanke explained.

Ultimately, his insights illustrate the urgent need for a fundamental recalibration of economic strategy, warning investors to prepare for significant ongoing market adjustments.

Steve H. Hanke is a Professor of Applied Economics at Johns Hopkins University. His most recent book, with Matt Sekerke, is Making Money Work: How to Rewrite the Rules of our Financial System, and was released by Wiley on May 6.