Former Fed Chair Alan Greenspan: US Economic Recession 'Likely'
Greenspan believes a recession is likely thanks to the Fed's aggressive rate hikes intended to fight inflation.
Alan Greenspan is 96. He served five terms as the Federal Reserve chair over 19 years and under four presidents. So when he doubts the Fed's recent rate hikes, plenty of people listen.
As CNN reports, Greenspan is an economic adviser to Advisors Capital Management. On Tuesday, the company published comments from Greenspan on its website as part of a "Year-End Q&A." He was straightforward.
Asked if he thought a recession might be necessary to bring down inflation, Greenspan said, "A recession does appear to be the most likely outcome at this time."
"While the last two monthly inflation reports did show a deceleration in the rate of price increases," Greenspan continued, "it does not change the fact that prices are still increasing. Indeed, official inflation numbers could remain tame in the near term owing solely to the methodology by which they are measured, most notably housing costs."
"However," Greenspan concluded, "I don't think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession."
According to Greenspan, better wages and widespread employment also "need to soften further for a pullback in inflation to be anything more than transitory."
"So," he says, "we may have a brief period of calm on the inflation front, but I think it will be too little too late."
Regarding interest rate hikes, Greenspan also indicated the Fed is unlikely to relax them for fear of inflation getting worse, possibly putting a volatile economy "back at square one."
"Furthermore," he said, "this could potentially damage the Federal Reserve's credibility as a purveyor of stable prices, especially if the action were seen to be taken merely to protect the stock market rather than in response to truly unstable financial conditions."
Ultimately, Greenspan sounded more optimistic about the economy in 2023 than not. As far as he's concerned, we've already been through worse:
I do not expect 2023 to be as volatile. We went from a Federal Reserve that expected inflation to be transitory to one that deemed seven consecutive rate increases over ten months necessary to tamp down inflation. That is a total increase of 4.25 percentage points in the federal funds target rate, with more expected to come. Add in the massive amount of uncertainty generated by the war in Ukraine and I believe 2022 would be a tough year to top with respect to market volatility.