(Bloomberg) — Former Federal Reserve Chair Alan Greenspan said a US recession is the “most likely outcome” as the central bank tightens monetary policy to curb inflation.
While the last two monthly reports showed a deceleration in consumer-price increases, “I don’t think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession,” Greenspan — now a senior economic adviser to Advisors Capital Management — said in a question-and-answer commentary on ACM’s website distributed Tuesday.
The Fed raised interest rates aggressively last year in a bid to pull inflation down from a 40-year high, and says it will keep tightening policy until the job is done.
Wage increases, and by extension employment, still need to soften further for the pullback in inflation to be anything more than transitory, Greenspan said.
“We may have a brief period of calm on the inflation front but I think it will be too little too late,” he said.
The risk of lowering rates too quickly is that inflation “could flare up again and we would be back at square one,” Greenspan said. That could damage the Fed’s credibility as the guarantor of stable prices, he said.
“For that reason alone, I do not expect the Federal Reserve to loosen prematurely unless they deem it absolutely necessary, for example, to prevent financial market malfunctioning,” he said.