Alan Greenspan’s 1998 Statement Haunting Janet Yellen Today
When Federal Reserve Chairman Alan Greenspan made a famous speech in 1998, no one knew how relevant it would be to Janet Yellen in 2015. Greenspan’s warning that the U.S. economy would suffer from global turmoil appears prophetic nearly two decades later.
In a speech at the University of California, Berkeley, Greenspan dropped some big-picture wisdom. He said “it is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” (Source: Federal Reserve, September 4, 1998.)
Putting aside the elegant phrasing, there is a ton of value here. Greenspan is making the case that the U.S. economy is not an island cut off from the world. Its fate is directly linked to the well-being of everyone else.
However, Greenspan may have been 15 years too early on his warning. The U.S. labor market was performing exceptionally well in his day, and though it was slightly disrupted by the Dot Com Crash of 2000, unemployment did not spike as it would eight years later.
Another key difference was the state of the Middle Class. The average American saw their income hit all time highs around 1998, a far cry from the stagnating wages that characterize the 2000s. The U.S. labor market has degraded with time.
U.S. Economy No Longer An “Oasis of Prosperity”
Altogether, Janet Yellen is facing a far worse situation than what Alan Greenspan was up against. Greenspan governed the Federal Reserve when the U.S. economy was booming. Gross domestic product (GDP) was growing at five percent when he issued his warning and the unemployment rate was dropping from 4.6% to 3.8%. (Source: MarketWatch, September 23, 2015.)
Contrast that with a 6.7% unemployment rate when Janet Yellen was sworn into the Federal Reserve. On top of being the first-ever Chairwoman of America’s central bank, Yellen was also left the momentous task of saving the U.S. economy.
She has to juggle market expectations for a normalization of monetary policy amidst a stock market crash in China and ongoing crises in Europe. All of that is on top of the Fed’s mandate to control inflation and financial stability. To make matters worse, Janet Yellen doesn’t even have room to cut interest rates.
After his speech at Berkeley, Greenspan still cut interest rates by 75 basis points. Unfortunately, Janet Yellen couldn’t do that if her life depended on it. The Federal Reserve has been in a constant state of crisis management since 2008.
Chart courtesy of www.StockCharts.com
The federal funds rate forms the basis of most other interest rates in the U.S. economy. Car loans, mortgages, and credit card debt are all tagged to a rate set by the Fed. Lowering rates in the way Alan Greenspan did is meant to encourage borrowers to borrow more.
But Janet Yellen has no room to cut rates. The bandwidth of the federal funds rate has been zero to 0.5% for years on end. Right now the rate is hovering around 0.14%, making it impossible to go lower. I bet right now Janet Yellen would gladly trade places with 1998 Alan Greenspan.