Greenspan Warns on Sharp Fed Rate Cuts: FT

Former Federal Reserve Chairman Alan Greenspan said his successors at the U.S. central bank should act cautiously in lowering interest rates because of inflation risks, according to an interview published on Sunday.

Greenspan said the Fed should be careful not to cut rates too aggressively because the risk of an "inflationary resurgence" is greater now than when he was chairman, the Financial Times reported.

The U.S. central bank meets on Tuesday and is widely expected to cut the benchmark federal funds rate -- currently at 5.25% -- by at least a quarter of a percentage point to help the economy weather a housing downturn and a credit crunch.

Greenspan said the U.S. housing slump is likely to deepen more than many analysts expect, with home prices possibly recording as much as a double-digit drop.

The Fed is currently weighing the adverse impacts of the housing downturn on the broader economy, and a recent report showing employers shed 4,000 jobs in August raised warning flags.

Greenspan said he would expect "as a minimum, large single-digit" percentage declines in U.S. house prices from peak to trough, but would not be surprised if the decline is bigger, the newspaper reported.
     
Underlying Strength

But Greenspan, who is promoting a memoir that hits bookstore shelves on Monday, said that while U.S. home prices have not yet hit bottom, turmoil in housing and credit markets does not currently look like it will produce a broader economic downturn.

Greenspan stepped down as chair of the Federal Reserve in January 2006 after more than 18 years at the helm of the U.S. central bank. His book is entitled, "The Age of Turbulence: Adventures in a New World."

Greenspan said in his interview with the Financial Times that the possibility that the housing slump will cause consumers to reduce spending makes it a particularly tricky challenge for policy makers.

While his memoir has drawn praise for candor and its direct, chatty tone, Greenspan showed a flash of his old opaque style in evading a question about the prospects for a U.S. recession, which he had put at a one-in-three chance earlier in the year.

"We're not in one now. That we're not headed for one is a forecast which has yet to unfold one way or another," he said in an interview with Newsweek.
     
Inflation Worries

The former Fed chair cautioned in his book that the biggest long-term threat to the U.S. economy is not the current housing correction but the likelihood that inflationary pressures will resume over time. "Our problem over the long run is the re-emergence of inflation," he writes.

As economic globalization winds down -- as workers from the former centrally planned economies of Eastern Europe are absorbed and as the costs of Chinese imports begin to rise -- the forces that have kept prices down will disappear, he said.

The Fed could keep inflation at desired levels, but might have to raise interest rates into the double-digits to do so, Greenspan writes. 

The U.S. central bank could well face powerful political pressure not to raise borrowing costs to such draconian levels. "We could see a return of populist, anti-Fed rhetoric, which has lain dormant since 1991," he writes.

CNBC's Maria Bartiromo's candid one-on-one interview with the former Chairman of the Federal Reserve reveals the challenges and crisis he faced during his 18-year career. The interview premieres Monday, 17th September,  9 p.m. ET.

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