Alan Greenspan, former chairman of the Federal Reserve, said the central bank needs to begin cutting back on its unprecedented asset purchases and move toward stopping them altogether.
“The sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve, which everyone agrees is excessive, the better,” Greenspan said on CNBC television today. “The issue is not only a question of when we taper down, but when do we turn? And I think that the markets may not give us all of the leeway we would like to do that.”
The policy-making Federal Open Market Committee has said the central bank will buy $85 billion in bonds every month until the labor market outlook improves “substantially.” Payrolls rose by 175,000 last month, more than economists forecast, while the unemployment rate edged up to 7.6 percent from 7.5 percent, the Labor Department said today after Greenspan spoke.
Greenspan, 87, said while slowing bond purchases must be an initial step, a lower rate of asset purchases will still add to the Fed’s balance sheet, which has reached a record $3.4 trillion.
Asked if he thinks the economy is strong enough to drop the policy, known as quantitative easing, to zero, Greenspan said “we’ve got to do it even if we don’t think it’s strong enough.”
The Fed has also pledged to keep interest rates near zero as long as unemployment remains above 6.5 percent, the outlook for inflation between one to two years in the future doesn’t exceed 2.5 percent and long-term inflation expectations are “well-anchored.”
Greenspan, who was Fed chairman from 1987 to 2006, said the central bank will have to proceed cautiously.
“If we do move too rapidly with respect to Fed action, it will really shock the market,” Greenspan said. “Gradual is adequate, but we’ve got to get moving.”
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