New York CNN —
Former Federal Reserve Chairman Alan Greenspan believes a US recession is the “most likely outcome” of the Fed’s aggressive rate-hike program aimed at curbing inflation. He joins a growing chorus of economists predicting an imminent economic downturn.
His views are particularly important. Greenspan not only served five terms as Fed chairman under four different presidents between 1987 and 2006, but was also the last chairman to achieve 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 stable and avoid a recession.
Greenspan, now 96, said in a note this week that he doubts this current hike will result in a repeat of the feat.
Data for the past two months showed prices are starting to slow – good news, but not good enough, he said. “I don’t think this will justify a Fed about-face significant enough to avoid at least a mild recession,” said Greenspan, now chief economic adviser to Advisors Capital Management, in an op-ed published Tuesday on the Fed’s website company was published.
The Fed raised interest rates seven times last year, raising the rate banks charge each other for overnight loans to a range of 4.25% to 4.5%, the highest since 2007. Fed officials still expect, according to the Fed, raise interest rates by another percentage point forecasts released during their December monetary policy meeting.
Wage increases, and with them employment, “need to fall further for a drop in inflation to be more than temporary,” 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, coming in at 3.7% in November. New employment data is due to be released on Friday morning.
Greenspan doubts the Fed will ease rates any time soon because “inflation could flare up again and we’d be back to zero,” he said. “Additionally, this could potentially affect the Federal Reserve’s credibility as a provider of stable prices, especially if actions are taken merely to protect the stock market and not in response to truly unstable financial 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 is going to be a tough year in terms of market volatility,” he noted.