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Greenspan: Rate Hikes Will 'Pressure Stocks Downward'

man clutching head in shock with red arrow climbing up then plunging amid blue stock background
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By    |   Friday, 26 October 2018 01:29 PM

Former Federal Reserve Chairman Alan Greenspan warns that continuously hiking interest rates will only push struggling stock prices even lower.

"We're in the process of adjustment, and the adjustment is that we've had interest rates in this country at the lowest level in American history,” Greenspan recently told WBUR.ORG.

“We're now coming out of it and gradually adjusting. So long as long-term interest rates continue to rise ... the pressure is going to be downward on stock prices. But it's very difficult to say where it goes from here," Greenspan said.

Meanwhile, Greenspan didn’t comment directly on President Donald Trump’s recent criticism of the central bank, but said the situation really isn’t new.

"I don't know a single president, and I worked for a lot of them, who don't want lower interest rates. Now, obviously that's not possible. You keep lowering them down to zero, where do you go from there?" he asked.

Greenspan also wasn’t optimistic that the Trump tax cuts will continue to boost economic growth.

"I think it's probably largely over in the sense of the adjustment … the impact has been really quite significant but it's already completed."

To be sure, one Fed official said the recent cratering of stock markets is nowhere near severe enough to rattle confidence and significantly hurt U.S. business and consumer spending.

In a speech, Loretta Mester, president of the Cleveland Fed, reinforced the U.S. central bank's steady-as-she-goes expectation to keep gradually raising interest rates in the face of a nearly month-long fall in major U.S. equity indexes, which has been driven by worries over the effects of U.S. tariffs and a slowdown in China, Reuters reported.

"While a deeper and more persistent drop in equity markets could dash confidence and lead to a significant pullback in risk-taking and spending, we are far from this scenario," said Mester, who leans somewhat hawkish.

"Similar to the swings in the market we saw earlier this year, the movements of late do not seem to be signaling that investors are becoming overly pessimistic," she added.

The roughly 7 percent selloff in the S&P 500 this month has also reflected concerns over corporate earnings and higher borrowing costs, investors say. The Fed raised rates last month to above 2 percent, and expects to hike again in December amid what Mester called a “very strong” labor market.

Overall, she said, the economy is doing “very well,” with inflation at the Fed’s 2 percent goal and business and consumer spending expected to remain robust, with no strong pullback in a cooling housing market.

With unemployment at 3.7 percent, its lowest rate since the 1960s, Mester, like Fed Chair Jerome Powell, framed monetary policy as a balance between risks of overheating the economy and unnecessarily choking off its nearly record-long expansion.

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Former Federal Reserve Chairman Alan Greenspan warns that continuously hiking interest rates will only push struggling stock prices even lower.
greenspan, rate, hikes, stocks
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2018-29-26
Friday, 26 October 2018 01:29 PM
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