Sun, Sep 16, 2007 - Page 11 News List

US Fed may need to double interest rate: Greenspan

BLOOMBERG

The US Federal Reserve may need to double its benchmark interest rate to at least 10 percent by 2030 to contain inflation, sparking a political showdown that could challenge its independence, former Fed chairman Alan Greenspan said.

Slowing productivity and rising wages abroad will probably cause US consumer prices to climb in the next quarter century, Greenspan wrote in his book The Age of Turbulence: Adventures in a New World, published by Penguin Press.

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. US Democrats including Barney Frank, who heads the House Financial Services Committee, called last week for a cut in interest rates.

"Federal Reserve independence is not something set in stone," Greenspan wrote.

Greenspan, 81, led the Fed for 18 years until January last year.

"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," he wrote.

The book is scheduled for publication tomorrow. The Wall Street Journal published an account on its Web site yesterday after buying a copy at a New York-area bookstore.

To keep inflation under 2 percent, "the Fed, given my scenario, would have to constrain monetary expansion so drastically that it could temporarily drive up interest rates into the double-digit range not seen since the days of Paul Volcker," Greenspan wrote.

Volcker was Greenspan's predecessor and faced criticism from members of Congress as he lifted borrowing costs to rein in prices, sending the economy into a recession in 1980 and 1981.

Fed Chairman Ben Bernanke, who took the helm in February of last year, 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.

The Federal Open Market Committee will cut the benchmark by a quarter point on Tuesday to 5 percent, a median forecast in a Bloomberg News survey of economists predicted.

Frank said in a Sept. 7 statement that the Fed should make "a meaningful interest-rate cut" to help the economy.

Democratic US Representative Carolyn Maloney said the same day the cut was "no longer a question for the Fed."

Greenspan helped guide the longest economic expansion in US history, lasting from 1991 to 2001. Growth averaged a 3 percent annualized rate during the former Fed chief's time at the central bank.

The economy will probably slow down to a pace of less than 2.5 percent on average from now until 2030, Greenspan forecast in the book.

Consumer prices, which increased at an average annual rate of 3.1 percent during Greenspan's tenure, will likely climb by 4.5 percent or more a year in the future, he wrote.

Ten-year Treasury yields may average 8 percent by 2030, he said.

"How the Federal Reserve responds to a re-emergence of inflation" will have "a profound effect not only on how the US economy of 2030 turns out but also, by extension, on our trading partners worldwide," Greenspan wrote in the book.

The former chairman built his projection on three economic shifts that he said can already be seen.

First, the 1990s boom in productivity, which allowed workers in the US to produce more goods and services without pushing up prices, is fading.

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