Greenspan: Higher inflation to warrant double-digit rates in future

The former Fed Chairman warns that interest rates will have to be raised.

ByABC News
February 12, 2009, 9:30 AM

WASHINGTON -- Former Fed Chairman Alan Greenspan predicts in a new book out Monday that the Fed will have to raise interest rates to double-digit levels in coming years to thwart inflation.

Greenspan, 81, says in The Age of Turbulence that the inflation-damping effect of globalization, which has led to lower wage pressures, inflation and interest rates worldwide, will recede.

At some point, the flow of people into the workforce in developing countries such as China, which has seen a movement of workers from farms into factories, will slow, leading to stronger wage pressures and prices, he says. The impact will be global.

And the shift "may be upon us sooner rather than later," he says. Evidence: Prices of Chinese imports coming into the USA started rising earlier this year. That suggests that in the "next few years," inflation will build unless action is taken.

The Wall Street Journal first reported details of the book on its website Friday night, saying it had bought a copy of the book in a New York City-area bookstore. USA TODAY had received a copy of the book to review in advance and was given permission to run its story ahead of the official publication Monday.

Greenspan's prediction comes shortly before Fed officials are widely expected to cut interest rates for the first time in more than four years following turmoil in mortgage markets that has rippled through the entire financial sector, leading to concerns about a credit crunch and a slowdown in the overall economy.

Fed Chairman Ben Bernanke and his colleagues, who meet in Washington Tuesday, have kept their target for short-term interest rates, which influence borrowing costs economywide, at 5.25% for more than a year. Greenspan's assertion that the Fed may have to double rates from current levels suggests the Fed may put itself in a bind by cutting rates now.

Criticism of Bush over spending

In his 531-page book, the former Fed chairman sharply criticizes President Bush for not vetoing bloated spending bills and for continuing to focus on issues, such as adding prescription drug benefits to Medicare even though the budget surplus of just a few years ago had disappeared and deficits were mounting.