Alan Greenspan: Recession 'Likely' After Rate Hike

Alan Greenspan, the former chair of the Federal Reserve, said this week that a recession in the U.S. is the "most likely outcome" after the Fed dramatically raised rates in order to lower inflation.

Greenspan, who is currently a senior economic adviser to Advisors Capital Management, said in a Q&A released on Tuesday that "a recession does appear to be the most likely outcome at this time."

He added, "While the last two monthly inflation reports did show a deceleration in the rate of price increases, it does not change the fact that prices are still increasing. Indeed, official inflation numbers could remain tame in the near term owing solely to the methodology by which they are measured, most notably housing costs."

Greenspan went on to say, "However, I don't think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession. Wage increases, and by extension employment, still need to soften further for a pullback in inflation to be anything more than transitory. So we may have a brief period of calm on the inflation front, but I think it will be too little too late."

According to Greenspan, the "most obvious" risk when it comes to lowering interest rates too quickly "would be that inflation could flare up again and we would be back at square one. Furthermore, this could potentially damage the Federal Reserve's credibility as a purveyor of stable prices, especially if the action were seen to be taken merely to protect the stock market rather than in response to truly unstable financial conditions."

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