Greenspan predicts double-digit rates

WASHINGTON – Sept. 17, 2007 – A day before the Federal Reserve is expected to cut interest rates, former Fed chairman Alan Greenspan predicts in an interview and in a new book out today that the Fed will have to raise rates to double-digit levels in coming years to thwart inflation.

Greenspan’s prediction comes a day before Fed officials are widely expected to cut interest rates for the first time in more than four years following turmoil in mortgage markets that has rippled through the entire financial sector, leading to concerns about a credit crunch and a slowdown in the overall economy.

Fed Chairman Ben Bernanke and his colleagues have kept their target for short-term interest rates, which influence borrowing costs economy-wide, at 5.25 percent for more than a year.

Greenspan, 81, says in his book The Age of Turbulence that the inflation-damping effect of globalization, which has led to lower wage pressures, inflation and interest rates worldwide, will recede.

At some point, the flow of people into the workforce in developing countries such as China, which has seen a movement of workers from farms into factories, will slow, leading to stronger wage pressures and prices, he says. The impact will be global.

And the shift “may be upon us sooner rather than later,” he says. Evidence: Prices of Chinese imports coming into the USA started rising earlier this year. That suggests that in the “next few years,” inflation will build unless action is taken.

In an interview Friday afternoon, Greenspan said that double-digit rates, which haven’t been seen since the 1980s, will not be a long-term fixture.

“Double digit is something that is likely to happen for a short period of time,” he says, saying it’s hard to predict when such a big rate increase will be needed.

Does Greenspan think it’s bad to cut, when he thinks rates will need to be twice what they are now?

“I think that that question is one of the reasons why, when people say that the Bernanke Fed goes at a crisis differently than the way I did, they are missing the obvious point,” he tells USA TODAY.

“It was far easier for me to cut interest rates in a period of very low inflation ... than a period like now when you have to be seriously concerned about it,” he says.

“I don’t know anything that the Federal Reserve has done or said that I was likely to have done differently,” he says, arguing that people should not compare what he did in response to a prior crisis to now.

“We had the luxury of not worrying too much on the downside. That luxury is gone. So Ben is going to have a tougher time, more difficult decisions, than I had.”

Copyright 2007 USA TODAY, a division of Gannett Co. Inc., Barbara Hagenbaugh.