Greenspan says Federal Reserve should start tapering stimulus
WASHINGTON -- Former Federal Reserve Chairman Alan Greenspan said the central bank should start tapering its stimulus program and begin reducing its dramatically swelled balance sheet -- whether the economy is ready for it or not.
“My view is 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 told CNBC on Friday.
The Fed needed to scale back its monthly bond purchases slowly because it was unclear how financial markets would react. And for that reason, he said, the reductions need to get started now.
“If we do move too rapidly with respect to the Fed action it will really shock the market,” Greenspan said. “I think gradual is adequate, but we’ve got to get moving.”
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Greenspan’s comments came before the Labor Department reported that the labor market performed slightly better than anticipated in May. The economy added 175,000 net new jobs last month and the unemployment rate ticked up to 7.6%.
Investors and analysts have been watching economic data closely and parsing the public comments of Fed policymakers to try to determine when the central bank will scale down its monthly purchases of $85 billion in bonds.
The purchases, known as quantitative easing, began in September in an attempt to push down long-term interest rates and stimulate the economy.
Fed Chairman Ben S. Bernanke said last month that policymakers could begin scaling back the bond purchases in the next few months. Other Fed officials have pushed for tapering to begin as early as this month.
But Bernanke has warned against scaling back too soon, which could harm the economic recovery. It’s unclear if Friday’s largely status-quo jobs report would push Fed policymakers any closer toward action.
Asked on CNBC if the economy was strong enough to stand on its own without any Fed bond-buying, Greenspan said that was irrelevant.
“I don’t even think that’s the question,” said Greenspan, who chaired the Fed from 1987-2006 and is blamed for not foreseeing the housing bubble that triggered the Great Recession. “I think we’ve got to do it even if we don’t think it is strong enough.”
Greenspan said the concerns about when the Fed might start scaling back the bond program and reducing its $3.4 trillion balance sheet were affecting financial markets and it’s unclear how they will react when the stimulus is removed.
He said “we haven’t a clue” about how rapidly bond prices would fall and long-term interest rates would rise once the Fed starts scaling back its purchases. For that reason, the Fed needs to move slowly.
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