Former Federal Reserve Chairman Alan Greenspan thinks the economy is headed for a rough patch.
“A recession does appear to be the most likely outcome at this time,” Greenspan said in a commentary released this week. “While the last two monthly inflation reports did show a deceleration in the rate of price increases, 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, I don’t think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession.”
As CNN’s Nicole Goodkind notes, Greenspan’s view carries extra weight since, in addition to running the central bank for nearly two decades, he is the last Fed chief to pull off a soft landing for the economy. In 1994, worried about a growing threat of inflation, Greenspan jacked up interest rates to 6%, successfully applying the brakes to the economy and avoiding a recession while laying the monetary foundation for a years-long boom during the rest of the Clinton administration.
Greenspan said Fed officials are likely more worried about easing too quickly in their battle against inflation than pushing too hard. If the Fed lowers interest rates too early, “inflation could flare up again and we would be back at square one.” Greenspan said, adding that such a move “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.” Given those constraints, Greenspan said he does “not expect the Federal Reserve to loosen prematurely unless they deem it absolutely necessary, for example to prevent financial market malfunctioning.”
But a recession may not be inevitable: Most economists agree with Greenspan’s outlook, but there are some who think the Fed can still achieve the soft landing it’s aiming for. David Mericle, chief U.S. economist at Goldman Sachs, told Politico’s Victoria Guida that the soft landing is “not a lost cause.”
“A recession is not inevitable,” Mericle said. “There’s a risk, a higher risk than usual, but we’re making pretty good progress so far.”
Other analysts think that while the economy may hit a rough patch, it won’t be too bad, more like a brief stall than a crash. “Don’t put a capital ‘R’ on it,” Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets, told Guida. “You and anybody else is barely going to know the difference between real GDP that declines by half a percent and one that increases by half a percent. It’s almost imperceptible.”
