Alan Greenspan Warns About Trying to Stimulate Economic Growth
In a recent interview with Fox Business, former Federal Reserve Chairman Alan Greenspan warned about trying to stimulate economic growth. While growth in economic productivity continues to remain limited, the Trump Administration has adopted a 3% annual GDP growth target as one of its aims. Greenspan believes that the government should be cautious in targeting a rate that high.
The primary means the government might attempt to hit a 3% target would be to urge the Federal Reserve to engage in looser monetary policy. That would obviously conflict with the Fed’s current aim of trying to raise its target federal funds rate and draw down the size of its balance sheet. But the Fed might not have a choice, as the Administration’s desire for economic growth might result in the President ordering the Fed to pull out all the stops to hit that 3% target.
On the topic of the recently-nominated Jay Powell to head the Fed’s Board of Governors, Greenspan stated that he believed Powell has the ability to be successful. While Powell is not an economist, he has the entirety of the Fed’s research staff at his disposal, which Greenspan called the best research operation in the world.
While the Fed’s economists are undoubtedly intelligent, Powell likely won’t get any advice that’s much different from what his predecessors have been getting, thanks to the Fed’s outsized influence on the economics profession. Nearly every monetary economist in the country either works for the Fed has worked for the Fed or has been the recipient of some Fed scholarship or fellowship.
In their view, the Fed can do no wrong. So don’t be surprised to see more money creation once stock markets start to fall and the economy turns south. Wall Street will come begging to the Fed to bail it out once again, and the Fed will be only too happy to comply.