All eyes are watching the Fed, with thousands of American homeowners hoping for a small break in interest rates. Perhaps not so coincidentally, former Fed guru Alan Greenspan, after years as a great American sphinx, has become a great American chatterbox with the publication of his new memoir, The Age of Turbulence: Adventures in a New World. And Greenspan, who made his reputation as a rate cutter, is saying that he might not be cutting rates today if he were still at the Fed:

Most people think that if Alan Greenspan were still chairman of the Federal Reserve, the US central bank would have cut interest rates more quickly and aggressively in response to the turmoil in financial markets.

Not so, Mr Greenspan says. Over the course of three hours of interviews in his office on Washington, DC’s Connecticut Avenue, the former Fed chairman argues that times have changed.

“We are in a period now when it is far more difficult than it was when I was chairman,” Mr Greenspan says. “We were not worried about inflationary resurgence but now you have to be.” He adds: “You have got to be a lot more careful in lowering rates in response to crises.”

… Mr Greenspan says: “I am basically saying that the trade-off between unemployment and inflation has shifted.”

There are two planks to his argument. The less controversial one is that the US is entering a period of more subdued productivity growth. The former Fed chairman says companies would not be returning vast amounts of cash to their shareholders if they saw good opportunities for productivity-enhancing investment. “Innovation opportunities are, for the time being, somewhat saturated, whereas they were extraordinary in the 1990s,” he says.

The more controversial one is that the disinflationary effect of globalisation will soon start to ebb. “The rate of change of prices – or the degree of disinflation – is related to the rate of change of globalisation,” he argues.

The integration of a billion workers from the once centrally-planned economies of China and the former Soviet bloc into the global market system had a profoundly disinflationary effect on prices worldwide. But once all these workers are connected to the world economy, he says, “the rate of change goes to zero.”

“In the intermediate period, the disinflationary pressures I was fortunate to operate under are gradually disappearing.”

Interesting article from Krishna Guha at the Financial Times here.