Monday, September 17, 2007

Fed’s Autonomy May Be Threatened By Inflation, Warns Greenspan

Source : TODAY, Monday, September 17, 2007

The Federal Reserve Bank may need to double its benchmark interest rate to at least 10 per cent 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 US consumer prices to climb in the next quarter century, Greenspan said in his book, The Age of Turbulence: Adventures in a New World. 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 called last week for a “meaningful” cut in interest rates.

“Federal Reserve independence is not set in stone,” said Mr Greenspan, 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”.

To keep inflation under 2 per cent, the Fed “would have to constrain monetary expansion so drastically that it could temporarily drive up interest rates into the doubledigit range not seen since the days of Paul Volcker,” Mr Greenspan said. Mr Volcker, his predecessor, was criticised for lifting borrowing costs to rein in prices, sending the economy into a recession in 1980 and 1981.

Chairman Ben Bernanke, who took the Fed’s helm last February, faces pressure to cut rates after a housing recession spurred a sell-off in credit markets and the first loss of jobs in four years. — BLOOMBERG

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