Greenspan warns on sharp Fed rate cuts

(Agencies)
Updated: 2007-09-17 10:14

Greenspan warned in the the interview that it won't be clear for a while whether the housing downturn and turmoil in credit markets from a wave of delinquencies among mortgages to borrowers with blemished credit will hurt the broader economy economy or not.

"This is fundamentally, originally caused by the flattening out of home prices. And that is only now just beginning," he said.

But he expressed confidence the credit crisis would recede.

"This is a human behavior phenomenon and it will pass. The fever will break and euphoria will start to come back again," he said.

Inflation Worries

The former Fed chair, who earned wide praise for guiding the economy through its longest expansion on record and for his crisis-management skills, cautioned in his book that the biggest long-term threat to the US 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.

Inflation in the United States could rise to a rate of between 4 percent and 5 percent a year, Greenspan said, well above the 1 percent to 2 percent that some Fed officials have identified as their preferred inflation range.

The Fed could keep inflation lower, but to do so might have to raise interest rates into the double-digits, Greenspan writes. The US central bank could well face powerful political pressure not to raise borrowing costs to such draconian levels.

"Whether the Fed will be allowed to apply the hard-earned monetary policy lessons of the past four decades is a critical unknown," he writes. "We could see a return of populist, anti-Fed rhetoric, which has lain dormant since 1991."

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