Former central bank chief Alan Greenspan believes a US recession is the “most likely outcome” of the Fed’s aggressive rate hike regime intended to curb inflation. He joins a growing chorus of economists predicting an impending economic downturn.
His views are particularly important. Not only did Greenspan serve five terms as Fed chair under four different presidents between 1987 and 2006, but he was the last chair to successfully navigate a soft landing, in 1994. In the 12 months following February 1994, Greenspan nearly doubled interest rates to 6% and managed to keep the economy steady, avoiding recession.
Greenspan, now 96, said in a memo this week that he doubts this current tour will result in a repeat performance.
The last two months of data showed that prices are starting to slow down – good news, but not good enough, he said. “I don’t think that would warrant a Fed reversal significant enough to avoid at least a mild recession,” Greenspan, now a senior economic adviser for Advisors Capital Management, said in a comment posted on the company’s website Tuesday.
The Fed raised interest rates seven times last year, pushing the rate that banks charge each other to borrow overnight to a range of 4.25%-4.5%, the highest since 2007. Fed officials still expect to raise rates by another percentage points, according to estimates published during the monetary policy meeting in December.
Wage increases and, by extension, employment, “still need to soften further for a decline in inflation to be anything more than transitory,” Greenspan said. “So we may have a short period of calm on the inflation front, but I think it will be too little too late.” Unemployment is still near historic lows, and remained at 3.7% in November. New employment figures will be released on Friday morning.
Greenspan doubts the Fed will loosen interest rates soon because “inflation could flare up again and we’ll be back to square one,” he said. “Unfortunately, this could potentially damage the Federal Reserve’s credibility as a provider of stable prices, especially if the action was seen to be taken simply to protect the stock market rather than in response to truly unstable economic conditions.”
He sees some good news for investors on the horizon. Markets won’t be nearly as chaotic in 2023 as they were last year, he said. “I think 2022 will be a tough year to top in terms of market volatility,” he said.