Former Federal Reserve Chairman Alan Greenspan believes a recession in the United States is the “likeliest outcome” of the Fed’s aggressive rate hike regimen intended to rein in inflation. He joins a growing chorus of economists predicting an impending economic downturn.
His opinions are particularly important. Not only did Greenspan serve five terms as Fed chairman under four different presidents between 1987 and 2006, but he was the last president to make a soft landing, in 1994. In the 12 months since February 1994 , Greenspan nearly doubled interest rates to 6% and managed to keep the economy stable, avoiding recession.
Greenspan, now 96, said in a note this week that he doubts this current surge will translate into repeat performance.
Data from the past two months showed prices starting to slow — good news but not enough, he said. “I don’t think this will warrant a Fed reversal substantial enough to avoid at least a mild recession,” said Greenspan, now a senior economic adviser at Advisors Capital Management, in a comment posted on the firm’s website Tuesday.
The Fed raised interest rates seven times last year, raising the rate banks charge themselves for overnight borrowing to a range of 4.25% to 4.5%, the highest since 2007 Fed officials still expect to hike rates another full percentage point, according to projections released at their December monetary policy meeting.
Wage increases, and by extension employment, “need to ease further for any decline in inflation to be anything but transitory,” Greenspan said. “So we may have a brief period of calm on the inflation front, but I think it will be too little too late.” Unemployment rates remain near historic lows, holding steady at 3.7% in November. New employment data is expected to be released Friday morning.
Greenspan doubts the Fed will ease interest rates anytime soon because “inflation could pick up again and we’d be back to square one,” he said. “Furthermore, it could potentially damage the credibility of the Federal Reserve as a provider of stable prices, especially if the action was seen as being taken simply to protect the stock market rather than in response to truly unstable financial conditions. ”
He sees good news for investors on the horizon. Markets won’t be as chaotic in 2023 as they were last year, he said. “I think 2022 would be a tough year to top when it comes to market volatility,” he remarked.