Greenspan: Fed policy changes because economy changes

Former Federal Reserve Chairman Alan Greenspan says it's "perfectly credible that rates may go lower as a consequence" of a slowing economy.

Posted: Dec 19, 2018 8:53 AM
Updated: Dec 19, 2018 9:11 AM

Alan Greenspan says the party's over on Wall Street.

The former Federal Reserve chairman who famously warned more than two decades ago about "irrational exuberance" in the stock market doesn't see equity prices going any higher than they are now.

"It would be very surprising to see it sort of stabilize here, and then take off," Greenspan said in an interview with CNN anchor Julia Chatterley.

He added that markets could still go up further — but warned investors that the correction would be painful: "At the end of that run, run for cover."

Markets have staggered in recent weeks, with spooked investors selling over mixed messages coming from the White House concerning the status of trade negotiations with China and growing fears of a global economic slowdown.

The jitters come as the Federal Reserve's interest-rate setting committee prepares to meet Tuesday and Wednesday. They're expected to raise rates for the fourth time this year — though investors will also be combing for clues on their plans for 2019. Minutes from the Fed's last meeting in November signaled policymakers want to take a more flexible approach next year adding to investor anxiety.

On Monday, the S&P 500 closed the trading day at its lowest level since October 2017, while the Dow Jones Industrial Average plummeted more than 600 points at one point in the day.

"The volatility is a function of how we speak, think and feel — and it's variable," he said. "Unless you can somehow radically change human nature and how we respond, this is what you'll always get and have been getting. You have to count on it, if you're going to understand how the market functions."

President Donald Trump has in recent weeks taken repeated aim at current Fed chairman Jerome Powell, a former investment banker appointed last year by Trump himself. The President, a close market-watcher who has staked his presidency on the state of the economy, has accused Powell of trying to undercut him politically by slowing the economy down.

He blamed the Fed for the market rout in October, calling the Fed "out of control" and suggesting Powell seemed to enjoy raising rates. He also later called the Fed a "much bigger problem than China," referring to a trade war between the two countries.

One White House official said that Trump continues to privately express anxiety about the markets, even as he publicly insists the economy is strong.Before markets opened on Tuesday, Trump tweeted yet another fresh warning to Fed officials to slow down their rate hike plans, while encouraging policy makers to read a Wall Street Journal editorial "before they make another mistake."

"Don't let the market become any more illiquid than it already is," Trump tweeted. "Stop with the 50 B's. Feel the market, don't just go by meaningless numbers. Good luck!"

It was the second day in a row Trump tweeted on the Fed's upcoming meeting. On Monday, Trump tweeted it was "incredible" that the Fed was considering a rate hike despite low inflation and a strong dollar.

But Greenspan, who was first appointed to the Fed by President Ronald Reagan and became the longest-serving chairman, remaining in his role into the George W. Bush administration, said a key driving factor in the market's volatility has been the "pronounced rise in real long-term interest rates."

The former chairman also warned that the United States may be poised for a period of stagflation, "a toxic mix" when the economy suffers from high inflation and high unemployment. The last time the country experienced such an episode was in the 1970s and early 1980s.

"How long it lasts or how big it gets, it's too soon to tell," said Greenspan. "We'll know it when we get on top of it."

Other economists, however, have expressed concerns about the risk of raising rates now, even at the risk of creating the impression that the President had cowed his own policymakers — whose independence from political pressure is intended to reassure markets that their decisions are free of political concerns.

"I'm in the peculiar position of thinking the Fed should not raise rates, but it should not listen to the President, which is a hard position," Nobel Prize-winning economist Paul Krugman said Monday on CNN's Quest Means Business. "There's a pretty good case for not raising rates now. But to not raise rates in this beating would look like they're allowing themselves to be bullied."

Greenspan, however, dismissed the idea that the Fed might cave to political pressure by the President.

"I've seen no evidence of that," said Greenspan, who said during his tenure he figuratively wore "ear muffs myself." Adding he never recalled a time when someone had wished he had raised rates.

"We listen — sometimes respectfully, sometimes not," he said. "But do we change policy? 'No.'"

Indiana Coronavirus Cases

(Widget updates once daily at 8 p.m. ET)

Confirmed Cases: 36096

Reported Deaths: 2231
CountyConfirmedDeaths
Marion10095598
Lake3833203
Allen175371
Cass15927
Elkhart149528
St. Joseph133736
Hendricks119276
Hamilton118394
Johnson1121112
Madison59961
Porter55830
Clark53041
Bartholomew52739
LaPorte44624
Howard44036
Tippecanoe4294
Jackson3992
Shelby39722
Delaware38940
Hancock35127
Boone32435
Floyd32340
Vanderburgh2892
Morgan28426
Noble26821
Montgomery24818
Clinton2461
White2389
Decatur23131
Grant22523
Dubois2093
Harrison19522
Henry18412
Kosciusko1792
Vigo1788
Marshall1782
Greene17225
Dearborn17022
Monroe17012
Lawrence16724
Warrick16729
Miami1441
Putnam1427
Jennings1324
Orange13122
Scott1263
Franklin1168
LaGrange1162
Ripley1086
Daviess9916
Carroll943
Steuben882
Wayne866
Wabash802
Fayette797
Newton7810
Jasper731
Jay540
Clay533
Randolph523
Rush513
Washington501
Fulton501
Pulaski500
Jefferson491
Whitley453
DeKalb441
Starke393
Perry390
Huntington382
Sullivan371
Owen341
Wells340
Brown331
Benton320
Knox310
Blackford272
Tipton261
Crawford240
Fountain222
Switzerland210
Spencer211
Adams211
Gibson192
Parke180
Posey160
Martin130
Ohio130
Warren121
Vermillion100
Union90
Pike60
Unassigned0179

Illinois Coronavirus Cases

(Widget updates once daily at 7 p.m. CT)

Confirmed Cases: 124759

Reported Deaths: 5736
CountyConfirmedDeaths
Cook807133846
Lake8584330
DuPage7939392
Kane6581197
Will5742284
Winnebago239761
McHenry166078
St. Clair122791
Kankakee97553
Kendall83319
Rock Island69424
Champaign6717
Madison61265
Boone48817
DeKalb4438
Sangamon35929
Jackson29610
Peoria28611
Randolph2734
McLean22413
Ogle2233
Stephenson2095
Macon19920
Clinton18917
Union17114
LaSalle15916
Whiteside14713
Iroquois1334
Coles12917
Warren1200
Out of IL1191
Grundy1072
Knox1020
Jefferson10116
Monroe9812
McDonough9313
Unassigned840
Lee821
Tazewell785
Cass740
Williamson743
Henry700
Pulaski570
Marion510
Jasper467
Macoupin462
Adams441
Morgan421
Perry420
Montgomery411
Vermilion411
Livingston362
Christian354
Jo Daviess321
Douglas280
Jersey241
Fayette213
Woodford212
Ford201
Menard200
Washington190
Mason180
Mercer180
Bureau171
Hancock171
Shelby161
Carroll152
Schuyler130
Alexander120
Bond121
Franklin120
Fulton120
Moultrie120
Clark110
Crawford110
Johnson110
Logan110
Piatt110
Brown100
Cumberland100
Wayne91
Henderson80
Effingham71
Massac70
Saline70
Greene60
Wabash60
Marshall50
De Witt40
Lawrence40
Richland40
Stark30
Clay20
Edwards20
Gallatin20
Hamilton20
White20
Calhoun10
Edgar10
Hardin10
Pike10
Pope10
Putnam10
Terre Haute
Clear
85° wxIcon
Hi: 90° Lo: 70°
Feels Like: 88°
Robinson
Scattered Clouds
83° wxIcon
Hi: 87° Lo: 68°
Feels Like: 86°
Indianapolis
Broken Clouds
85° wxIcon
Hi: 88° Lo: 70°
Feels Like: 87°
Rockville
Clear
80° wxIcon
Hi: 88° Lo: 69°
Feels Like: 82°
Casey
Few Clouds
83° wxIcon
Hi: 88° Lo: 70°
Feels Like: 87°
Brazil
Clear
85° wxIcon
Hi: 88° Lo: 69°
Feels Like: 88°
Marshall
Clear
85° wxIcon
Hi: 88° Lo: 70°
Feels Like: 88°
Sunny and Hot
WTHI Planner
WTHI Temps
WTHI Radar

WTHI Events