Former Federal Reserve Chairman\u00a0Alan Greenspan\u00a0believes a US recession is the \u201cmost likely outcome\u201d of the Fed\u2019s aggressive rate hike regime meant to curb inflation. He joins a growing chorus of economists predicting imminent economic downturn.
\nHis 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\u00a0a soft landing, in 1994. In the 12 months that followed February 1994 Greenspan nearly doubled interest rates to 6% and managed to keep the economy steady, avoiding recession.
\nGreenspan, now 96, said in a note this week that he doubts this current bout of hikes will result in a repeat performance.
\nThe last two months of data showed that prices are beginning to decelerate \u2013 good news but not good enough, he said. \u201cI don\u2019t think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession,\u201d said Greenspan, now a senior economic adviser to Advisors Capital Management, in commentary released on the company\u2019s website Tuesday.
\nThe Fed\u00a0hiked interest rates\u00a0seven times last year, increasing the rate that banks charge each other for overnight borrowing to a range of 4.25%-4.5%, the highest since 2007. Fed officials still expect to raise rates by another percentage point, according to projections released during their December monetary policy meeting.
\nWage increases and, by extension, employment, \u201cstill need to soften further for a pullback in inflation to be anything more than transitory,\u201d said Greenspan. \u201cSo we may have a brief period of calm on the inflation front, but I think it will be too little too late.\u201d Unemployment rates remain near historic lows, holding at 3.7% in November. New employment data is set to be released Friday morning.
\nGreenspan doubts the Fed will loosen interest rates soon because \u201cinflation could flare up again and we would be back at square one,\u201d he said. \u201cFurthermore, this could potentially damage the Federal Reserve\u2019s 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.\u201d
\nHe does see some good news for investors on the horizon. Markets won\u2019t be nearly as chaotic in 2023 as they were last year, he said. \u201cI believe 2022 would be a tough year to top with respect to market volatility,\u201d he remarked.<\/p>\n