Loading ...WASHINGTON (MarketWatch) — The Federal Reserve won’t be able to exit from its accommodative monetary policy without some turmoil in financial markets, former U.S. central bank chairman Alan Greenspan said Wednesday on the eve of an interest-rate decision.
During an appearance at the Council of Foreign Relations in New York, Greenspan was asked if the Fed could engineer an exit without sparking a crisis.
Greenspan said he didn’t like the word “crisis” but that “turmoil” was a good substitute.
Then he replied, “I don’t think it is possible.”
Interest rates have been kept near zero since December 2008. Fed members say they expect to raise interest rates next year.
Also see: Here is when Fed officials see liftoff in interest rates
The former Fed chairman declined to say when the Fed should hike short-term interest rates.
The Fed on Wednesday is expected to announce it will stop buying bonds. Greenspan said that the Fed’s quantitative easing has failed in one of its goals to spur demand.
Inflation is “dead in the water” because effective demand is “dead in the water,” he said.
But quantitative easing has been a “terrific success” in getting the real rate of return on long-term assets down, boosting all income-earning assets.
“It hasn’t been a success in the demand side,” he said, because banks are simply parking the reserves at the central bank.
“They just let it sit. Unless or until that happens, you don’t galvanize economic activity,” he said.
“When that starts, all things can happen – and not all of them are good,” he said.
Greenspan said monetary policy is in uncharted territory. He said he was worried the “real pressure” will come when the markets demand higher rates from the Fed to keep reserve balances where they are, he said.
The former Fed chairman said he still has doubts about the viability of the euro. He said that without full political integration in Europe, the euro zone would break up.
There is a very high level of uncertainty holding back the U.S. economy, Greenspan said.
He said that concern about tax policy is a large part of the uncertainty and also the rate of entitlement spending.