Greenspan Warns On Sharp Fed Rate Cuts

Source : The Straits Times, Sep 17, 2007

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

Mr 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 US central bank meets on Tuesday and is widely expected to cut benchmark federal funds rates by at least a quarter-percentage point to help the economy weather a housing downturn and a credit crunch.

Mr Greenspan said the US housing slump is likely to deepen more than many analysts expect, 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 recent report employers shed 4,000 jobs in August raised warning flags.

Mr Greenspan said he would expect 'as a minimum, large single-digit' percentage declines in US house prices from peak to trough, the newspaper reported. The former Fed chair said he would not be surprised if the the drop was 'in double digits'.

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

'There is an underlying strength in the United States,' he said in an interview on the CBS programme 60 Minutes.

'And indeed, when you look around the world, even with this extraordinary credit problem, the economies seem to be holding up. But for the moment it does not look sufficiently severe that it will spiral into anything deeper,' he said, according to a transcript made available before air time.

Mr 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 behaviour phenomenon and it will pass. The fever will break and euphoria will start to come back again,' he said. -- REUTERS