Greenspan says its sensible for the Fed to think about insurance cut

  • Written by MarketWatch
  • Published in Economics
Bloomberg
Former Fed Chairman Alan Greenspan

Former Fed Chairman Alan Greenspan said Wednesday it made sense for the Federal Reserve to be mulling an insurance interest-rate cut, even as the economy was performing relatively well.

Asked in an interview on Bloomberg Television[1] if it was “sensible” for the Fed to be considering a so-called insurance rate cut, Greenspan said “yes.” After all, the U.S. added a robust 224,000 new jobs in June, calming worries about the health of an economy now entering a record 11th year of expansion.

There are “certain small probability events”” that could be very dangerous for the economy. “And it pays to act to see if you can fend it off,” Greenspan said.

Greenspan said he wasn’t sure that lower rates would be a remedy to uncertainty over trade and slowing global growth.

“They might and they might not,” he said.

An insurance rate reduction is seen as one that is done pre-emptively in an attempt to lessen the severity of problems brewing in the economy that could worsen. In this case, the Fed has signaled a willingness to cut rates by at least a quarter-of-a-percentage point at the conclusion of its two-day July 30-31 meeting to combat a yearlong Sino-American tariff battle, which has been cited by a number of American businesses as a headwind to growth. The trade dispute between the world’s largest economies has the potential to intensify.

Financial markets see a 75% chance of a quarter-point interest-rate cut next week and a 25% chance of a half-point cut, according to the CME Group data[2].

Greenspan said he thought wider budget deficits would ultimately lead to higher inflation. But he admitted that he had been predicting higher interest rates and inflation for some time without much to show for it.

The 93-year-old economist said he didn’t fully understand negative interest rates and said that he didn’t think his friends did either. Roughly $13 trillion in sovereign debt now bears a negative yield[3]....

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