Greenspan Sees Political Pressure on Fed as Inflation Picks Up
2007-09-15 00:03 (New York)
By Craig Torres
Sept. 15 (Bloomberg) -- The Federal Reserve may need to
double its benchmark interest rate to at least 10 percent by
2030 to contain inflation, sparking a political showdown that
could challenge its independence, former Chairman Alan Greenspan
said.
Slowing productivity and rising wages abroad will probably
cause U.S. consumer prices to climb in the next quarter century,
Greenspan wrote in his book, ``The Age of Turbulence: Adventures
in a New World,'' published by Penguin Press. His outlook
includes a reversal of many of the trends that aided the success
of his own tenure at the Fed.
There are already some signs that political scrutiny is
rising. Democrats including Barney Frank of Massachusetts, who
heads the House Financial Services Committee, called last week
for a ``meaningful'' cut in interest rates.
``Federal Reserve independence is not set in stone,'' wrote
Greenspan, 81, who led the Fed for 18 years until January 2006.
``The dysfunctional state of American politics does not give me
great confidence in the short run'' and there may be ``a return
of populist, anti-Fed rhetoric,'' he wrote.
The book, an advance copy of which was obtained by
Bloomberg News, is scheduled for publication on Sept. 17. The
Wall Street Journal published an account on its Web site
yesterday after buying a copy at a New York-area bookstore.
To keep inflation under 2 percent, ``the Fed, given my
scenario, would have to constrain monetary expansion so
drastically that it could temporarily drive up interest rates
into the double-digit range not seen since the days of Paul
Volcker,'' Greenspan wrote.
Volcker Example
Volcker was Greenspan's predecessor, and faced criticism
from members of Congress as he lifted borrowing costs to rein in
prices, sending the economy into a recession in 1980 and 1981.
Now, Chairman Ben S. Bernanke, who took the Fed's helm in
February of last year, faces some pressure to cut rates after a
housing recession spurred a sell-off in credit markets and the
first loss of jobs in four years.
The Federal Open Market Committee will cut the benchmark by
a quarter point on Sept. 18 to 5 percent, according to the
median forecast in a Bloomberg News survey of economists.
Frank said in a Sept. 7 statement that the Fed should make
``a meaningful interest-rate cut'' to help the economy.
Democratic Representative Carolyn Maloney of New York said the
same day it was ``no longer a question for the Fed.''
Greenspan helped guide the longest economic expansion in
U.S. history, lasting from 1991 to 2001. Growth averaged a 3
percent annualized rate during the former Fed chief's time at
the central bank.
Growth Forecast
The economy will probably slow to a pace of under 2.5
percent on average from now until 2030, Greenspan forecast in
the book.
Consumer prices, which increased at an average annual rate
of 3.1 percent during Greenspan's tenure, will likely climb by
4.5 percent or more a year in the future, he wrote. Ten-year
Treasury yields may average 8 percent by 2030, he said.
``How the Federal Reserve responds to a reemergence of
inflation'' will have ``a profound effect not only on how the
U.S. economy of 2030 turns out but also, by extension, on our
trading partners worldwide,'' Greenspan wrote in the book.
The former chairman built his projection on three economic
shifts that he said can already be seen. First, the 1990s boom
in productivity, which allowed Americans to produce more goods
and services without pushing up prices, is fading.
``There is little doubt, however, that the burst of U.S.
non-farm productivity growth from 1995 to 2002 has given way to
a lessened pace of growth,'' Greenspan wrote.
Productivity to Slow
Productivity gains averaged a 1.7 percent annual rate in
the first six months of this year, down from 3.6 percent during
the high-technology boom of 1999. Greenspan forecast a long-term
average of 2 percent for increases in output per hour.
Greenspan also forecast an end to the anti-inflation
pressures from the inclusion of China and other emerging
economies into the global trading system.
U.S. wage earners have suffered and consumers have
benefited from a one-time shift of millions of workers into the
world labor force. The former chairman once defined
globalization as the elimination of borders in the production of
goods and services.
``The continuing acceleration of the flow of workers to
competitive markets during the past decade has been a potent
disinflationary force,'' Greenspan wrote. ``That acceleration
has held down inflation virtually uniformly across the globe.''
That force may be coming to an end.
China Effect
``The rate of flow of workers to competitive labor markets
will eventually slow, and as a result, disinflationary pressures
should start to lift,'' Greenspan wrote. ``China's wage growth
should mount, as should its rate of inflation. The first signs
are likely to be a rise of export prices, best measured by the
prices of Chinese goods imported into the United States.''
U.S. Labor Department figures showed yesterday that costs
of imported Chinese products rose for a fourth straight month in
August.
The third source of pressure on inflation will come from
U.S. government budget deficits, according to Greenspan. Federal
spending absorbs private savings and uses them for less
productive purposes, imparting ``a bias toward inflation''
Greenspan wrote.
--Editor: Anstey (mfr/shw)
To contact the reporters on this story:
Craig Torres in Washington at +1-202-654-1220 or
ctorres3@bloomberg.net;
To contact the editor responsible for this story:
Chris Anstey at +1-202-624-1972 or canstey@bloomberg.net.
2007-09-15 00:03 (New York)
By Craig Torres
Sept. 15 (Bloomberg) -- The Federal Reserve may need to
double its benchmark interest rate to at least 10 percent by
2030 to contain inflation, sparking a political showdown that
could challenge its independence, former Chairman Alan Greenspan
said.
Slowing productivity and rising wages abroad will probably
cause U.S. consumer prices to climb in the next quarter century,
Greenspan wrote in his book, ``The Age of Turbulence: Adventures
in a New World,'' published by Penguin Press. His outlook
includes a reversal of many of the trends that aided the success
of his own tenure at the Fed.
There are already some signs that political scrutiny is
rising. Democrats including Barney Frank of Massachusetts, who
heads the House Financial Services Committee, called last week
for a ``meaningful'' cut in interest rates.
``Federal Reserve independence is not set in stone,'' wrote
Greenspan, 81, who led the Fed for 18 years until January 2006.
``The dysfunctional state of American politics does not give me
great confidence in the short run'' and there may be ``a return
of populist, anti-Fed rhetoric,'' he wrote.
The book, an advance copy of which was obtained by
Bloomberg News, is scheduled for publication on Sept. 17. The
Wall Street Journal published an account on its Web site
yesterday after buying a copy at a New York-area bookstore.
To keep inflation under 2 percent, ``the Fed, given my
scenario, would have to constrain monetary expansion so
drastically that it could temporarily drive up interest rates
into the double-digit range not seen since the days of Paul
Volcker,'' Greenspan wrote.
Volcker Example
Volcker was Greenspan's predecessor, and faced criticism
from members of Congress as he lifted borrowing costs to rein in
prices, sending the economy into a recession in 1980 and 1981.
Now, Chairman Ben S. Bernanke, who took the Fed's helm in
February of last year, faces some pressure to cut rates after a
housing recession spurred a sell-off in credit markets and the
first loss of jobs in four years.
The Federal Open Market Committee will cut the benchmark by
a quarter point on Sept. 18 to 5 percent, according to the
median forecast in a Bloomberg News survey of economists.
Frank said in a Sept. 7 statement that the Fed should make
``a meaningful interest-rate cut'' to help the economy.
Democratic Representative Carolyn Maloney of New York said the
same day it was ``no longer a question for the Fed.''
Greenspan helped guide the longest economic expansion in
U.S. history, lasting from 1991 to 2001. Growth averaged a 3
percent annualized rate during the former Fed chief's time at
the central bank.
Growth Forecast
The economy will probably slow to a pace of under 2.5
percent on average from now until 2030, Greenspan forecast in
the book.
Consumer prices, which increased at an average annual rate
of 3.1 percent during Greenspan's tenure, will likely climb by
4.5 percent or more a year in the future, he wrote. Ten-year
Treasury yields may average 8 percent by 2030, he said.
``How the Federal Reserve responds to a reemergence of
inflation'' will have ``a profound effect not only on how the
U.S. economy of 2030 turns out but also, by extension, on our
trading partners worldwide,'' Greenspan wrote in the book.
The former chairman built his projection on three economic
shifts that he said can already be seen. First, the 1990s boom
in productivity, which allowed Americans to produce more goods
and services without pushing up prices, is fading.
``There is little doubt, however, that the burst of U.S.
non-farm productivity growth from 1995 to 2002 has given way to
a lessened pace of growth,'' Greenspan wrote.
Productivity to Slow
Productivity gains averaged a 1.7 percent annual rate in
the first six months of this year, down from 3.6 percent during
the high-technology boom of 1999. Greenspan forecast a long-term
average of 2 percent for increases in output per hour.
Greenspan also forecast an end to the anti-inflation
pressures from the inclusion of China and other emerging
economies into the global trading system.
U.S. wage earners have suffered and consumers have
benefited from a one-time shift of millions of workers into the
world labor force. The former chairman once defined
globalization as the elimination of borders in the production of
goods and services.
``The continuing acceleration of the flow of workers to
competitive markets during the past decade has been a potent
disinflationary force,'' Greenspan wrote. ``That acceleration
has held down inflation virtually uniformly across the globe.''
That force may be coming to an end.
China Effect
``The rate of flow of workers to competitive labor markets
will eventually slow, and as a result, disinflationary pressures
should start to lift,'' Greenspan wrote. ``China's wage growth
should mount, as should its rate of inflation. The first signs
are likely to be a rise of export prices, best measured by the
prices of Chinese goods imported into the United States.''
U.S. Labor Department figures showed yesterday that costs
of imported Chinese products rose for a fourth straight month in
August.
The third source of pressure on inflation will come from
U.S. government budget deficits, according to Greenspan. Federal
spending absorbs private savings and uses them for less
productive purposes, imparting ``a bias toward inflation''
Greenspan wrote.
--Editor: Anstey (mfr/shw)
To contact the reporters on this story:
Craig Torres in Washington at +1-202-654-1220 or
ctorres3@bloomberg.net;
To contact the editor responsible for this story:
Chris Anstey at +1-202-624-1972 or canstey@bloomberg.net.
