Former Federal Reserve Chair Alan Greenspan warns that America is entering a “very tough” period of stagflation as it emerges from economic stagnation.
“As the inflationary pressures which now seem to be building, we’ve just been through a long period of stagnation, we’re moving now toward what we used to call stagflation,” he told Fox Business Network. Stagflation is commonly defined as persistent high inflation combined with high unemployment and stagnant demand in a country's economy.
Greenspan explained that the economic transition only appears positive in the short term.
“The short term outlook begins to look sort of slightly buoyant, because the inflation actually moves profitability, and you get a sense that maybe things are over. But that’s going to be a false dawn.”
Greenspan compared today’s economy to the 1970s.
“We’ve been through this period before of stagflation, back in the 1970s, and it’s going to be very tough to get our way beyond it.”
Greenspan pointed to concerns over the impact on long-term debt.
“There are pressures obviously emerging for long-term debt to start moving up. It’s [at] an extraordinarily low level.”
To be sure, Federal Reserve policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises, according to the minutes of the Fed's last policy meeting on June 13-14 released on Wednesday.
The details of the meeting, at which the U.S. central bank voted to raise interest rates, also showed that several officials wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year, Reuters reported.
"Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors...however, several participants expressed concern that progress...might have slowed and that the recent softness in inflation might persist," the Fed said in the minutes.
The committee questioned why financial conditions had not tightened despite recent rate rises and a few said equity prices were elevated.
U.S. stock prices edged lower after the minutes were released and yields on U.S. government debt rose slightly while the dollar firmed against a basket of currencies.
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