Former Federal Reserve Chairman Alan Greenspan said he doesn’t think the Fed can unwind years of extraordinary stimulus without causing turmoil in financial markets.
“I don’t think it’s possible,” Greenspan said during an event today at the Council on Foreign Relations in New York, responding to a question about the likely market impact of the Fed’s exit.
The Federal Open Market Committee is poised to announce the end of bond purchases, finishing its third round of quantitative easing, when it releases its latest policy statement today at 2 p.m. in Washington.
While the Fed’s bond-buying program has been a “terrific success” in boosting asset prices, it hasn’t galvanized effective demand in the real economy, Greenspan said.
The Fed’s bond purchases have had a “major effect” on price-to-earnings ratios, capitalization rates in real estate, and all income-earning assets broadly by “getting the real rate of return on long-term assets down,” Greenspan said.
The program “hasn’t been a success on the demand side for one fundamental reason,” Greenspan said. “What you’re basically seeing is an explosion of assets, an explosion of reserve balances, and that’s the only two statistics that are moving.”
The purchases created deposits in the financial system that largely returned to the Fed in the form of reserve balances.