Former Fed Chair Alan Greenspan Says Inflation is “Inevitably Going to Rise”
Former Federal Reserve Chairman Alan Greenspan issued his latest warning Tuesday about the fiscal situation in the U.S. He says the larger budget deficits ultimately will cause inflation.
The spending shortfall rose to just shy of $1 trillion in fiscal 2019. Greenspan told CNBC that “inflation is inevitably going to rise,” posing larger threats to the economy.
Greenspan said that inflation poses a larger threat to the U.S. economy as budget deficits rise.
“Right now, there’s no real inflation at play. But if we go further than we are currently, inflation is inevitably going to rise,” Greenspan told CNBC’s “Squawk on the Street.”
The U.S. inflation rate for years has held below 2% level that the Fed considers strong for a growing economy, as gauged by the central bank’s preferred measure.
Fed economists are watching the Phillips curve. Traditionally, this curve indicates that lower inflation will drive higher wages and push inflation gauges up simultaneously.
The U.S. ran a fiscal deficit in 2019 that fell shy of $1 trillion.
“That, on top of the stagnation we are seeing in many areas, is not very beneficent for the world economy and certainly not for the United States and China,” Greenspan said.
The deficit has increased under President Donald Trump, having gone from $665 billion during his first year in office in 2017 to 2019’s $984 billion jump, which is nearly a 50% increase.
Trump has urged the Fed to loosen monetary policy.
“This is the time to do it,” Trump tweeted.
“He’s wrong in even discussing the issue,” Greenspan said. “The Federal Reserve is a very professional outfit. They know more about the economy’s functioning, how it affects the money markets and the interest rate structure, far more than he does. … The best thing to do is to just disregard it. … I’m sure it was ill-advised.”
Meanwhile, Boston Fed President Eric Rosengren said on Tuesday that U.S. recession fears are unfounded.
“My own view is that it is unlikely we will have an economic downturn in the coming year, given the generally positive financial conditions and the continued accommodative monetary and fiscal policies,” Rosengren told an audience attending a luncheon speech to the Forecasters Club of New York.
He says the savings rate and household net worth are increasing, and that suggests consumers are well-positioned to spend.
“Plentiful jobs and growth in income have provided improvements in confidence and bode well for holiday sales and beyond,” he noted. “Fortunately for the economy, many consumers seem to be in a buying mood.”
Rosengren voted against all three of the Fed’s interest-rate cuts this year.
“My view is that it is appropriate to take a patient approach to considering any policy changes, unless there is a material change in the outlook,” he said.
Dallas Fed President Robert Kaplan sees interest rates staying steady next year.
Stocks moved higher Tuesday on Fed’s easier policy stance. The S&P 500 SPX, +0.10% index was looking to record a fourth straight record on Tuesday.
“With the recent positive economic news, and with monetary and fiscal policy already accommodative, I see no need to make the current stance of monetary policy more accommodative in the near term,” Rosengren said.