We’re more than five years into the current economic expansion, which means it’s entirely natural that we ought to be worrying about when it might end. This expansion has already lasted longer than most of its post-World War II counterparts, after all. Last year a few economists predicted that falling housing prices might send us into recession soon. That hasn’t happened yet, but again, any investor with half a lick a of sense knows that a recession is a possibility.
So why was it news yesterday when former Fed chairman Alan Greenspan said that it’s “possible” the economy will fall into recession toward the end of this year? And why did bond prices rise (and interest rates fall) in response?
Greenspan made pretty clear in his speech that by “possible” he really just meant possible, and wasn’t predicting anything. So here are my four explanations.
1) We’re all so used to hanging on to Greenspan’s every word that, even though he no longer controls U.S. monetary policy, we still act as if he does.
2) Bond investors are dense, had forgotten that recession was a possibility, and were shocked when Greenspan pointed out that it was.
3) Initial reports and trading-floor rumors made it sound as if Greenspan were actually predicting a recession.
4) Bond markets moved for some other reason, and the whole Greenspan-speech thing was a media phantasm.