Former Federal Reserve Chairman Alan Greenspan, in a wide-ranging interview on the FOX Business Network’s “Mornings with Maria,” said Jerome Powell, President Trump’s nominee to head the central bank, has the ability to be successful.
“He’s not an economist but when you think of the complexity of the issues of the staff on the Fed, the research operation of the Federal Reserve system is the best in the world, and he has backing up and supplying information on every subject you can imagine… He’s going to confront the problems with a great deal of uncertainty in the way all of us who are in that slot must do,” Greenspan told Maria Bartiromo.
The Fed, in September, said it would begin to unwind its $4.5 trillion balance sheet and keep low interest rates in place for the remainder of this year and next. Greenspan estimates, however, that shrinking the balance sheet will only put upward pressure on rates over the next couple of years.
“It’s not the $4 trillion balance sheet that you need to be worrying about because remember a goodly part of that is the holding of Treasury securities by the Federal Reserve so that there is double counting. If you handle the Treasury Department plus the Federal Reserve as a monetary unit, there’s a great deal of intra-movement of funds which get washed out. So the science is nowhere near $4.5 trillion,” he said.
In Greenspan’s opinion, the U.S. also has a growth problem.
“What’s causing the problem is that productivity growth has been virtually stagnant... So with that low a rate of productivity growth you don’t have an underlying GDP growth and with the number of people becoming available now shrinking. Remember we have effective full employment now and we’ve got pressures now where upward pressure on wages is going to accelerate largely because it’s supply and demand. So it’s a situation where it’s not conducive to big takeoff,” he said.
Though President Donald Trump has promoted 3% gross domestic product (GDP) as the foundation of the administration’s economic plan, Greenspan offered a different overall assessment.
“My general view is the fact that we’re not about to go down as far as I can see but I would be very cautious about having large 3%-plus rates of GDP growth in the immediate future,” he said.
The U.S. has relied heavily on monetary policy to stimulate economic growth, but the Trump administration expects to boost GDP by 3 to 5% in less than three years, with recently proposed changes to the tax code and the corporate tax rate. Nonetheless, in Greenspan’s opinion, the GOP tax plan will not generate enough growth to move the needle on the economy.
“The corporate tax is way out of line on the upside… I like the issue of going down to 20% from 35 but don’t look to that as a major factor in expanding the economy. It just brings us back to neutral as far as our relative competitiveness around the world,” said Greenspan.