Will Greenspan Have Something New to Say?
The most important U.S. economic indicator this week will come from the mouth of Federal Reserve Board Chairman Alan Greenspan.
On Tuesday, and then in a reprise on Wednesday, he’ll tell Congress what he thinks about where the U.S. economy is headed. This will be the second of Greenspan’s twice-yearly--and very closely watched--Humphrey-Hawkins testimony.
The central issue is whether the Fed believes it might have to act soon to tighten credit again--to keep the U.S. economy from accelerating to a pace that might trigger higher inflation--or whether the central bank can afford to allow faster growth because structural changes in the global economy are keeping inflation restrained.
“A lot of people are thinking the Fed chairman is shifting in favor of this ‘new economy’ idea--that he may be more tolerant of growth because he doesn’t see the past relationship between growth and [higher] inflation holding up anymore,” said Dan Laufenberg, chief U.S. economist at American Express Financial Advisors in Minneapolis.
“People will be looking for hints of how patient he’s willing to be.”
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If Greenspan does suggest that he’s willing to let the economy move ahead at a growth rate higher than he might previously have thought possible, that would be yet another green light for stock and bond markets, analysts say.
Last Wednesday, long-term bond yields fell to seven-month lows and the Dow Jones industrial average surged over the 8,000 mark after a flurry of government reports suggested that the economic “nirvana” of the past year is continuing: decent growth, minuscule inflation.
But on Friday, a report showing that U.S. consumer confidence hit new highs this month, and that import buying jumped sharply in June, hinted that the relative slowdown in the economy during the spring may not last.
If growth begins to pick up to the strong pace seen in the first quarter, the fear is that the Fed will finish what it started on March 25, when it raised short-term interest rates for the first time in two years.
That concern, especially ahead of Greenspan’s testimony, may have motivated some investors to sell on Friday, driving the Dow down 130.31 points, or 1.6%, to 7,890.46, and pushing the yield on the bellwether 30-year Treasury bond to 6.53%, up from the week’s low of 6.47%.
Many economists expect Greenspan to be his usual cautious self in his testimony, reminding Americans that the Fed’s primary job is to keep inflation at bay. The big question is whether he might sanction the idea that “this time is different”--meaning that global competitiveness issues and other structural economic changes are putting so much downward pressure on inflation that the Fed can afford to let the economy grow faster.
“I’d expect him to throw a little cold water [on the nirvana economy idea], but not very much,” said William Michaelcheck, chairman of Mariner Partners in New York. “As long as he doesn’t say, ‘We need to preempt and tighten [credit],’ the market will go on its merry way.”
Greenspan publicly warned in February and March that the Fed was nearing a credit-tightening move. His words helped spark the stock market decline that began in February and early March and continued to mid-April, shaving about 10% off the Dow. Once the economy began to slow a bit, however, investors rushed back into stocks and bonds on the assumption that the Fed would refrain from raising rates further--a correct bet, at least so far.
In the meantime, some U.S. lawmakers have attacked Greenspan, arguing that the March rate increase was wholly unnecessary. “The occasion [Tuesday and Wednesday] will give Congress the opportunity to scold him,” noted Scott Brown, economist at Raymond James & Associates in St. Petersburg, Fla.
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This time around, the stakes are far higher for Wall Street: The Dow is up 22% year-to-date, and many stocks are selling for lofty prices relative to earnings. Most analysts say those prices simply can’t last, let alone rise further, if interest rates suddenly begin to rise.
What will also be interesting to see is whether Greenspan makes any unsolicited comments about the stock market’s heights. In December, in a now infamous speech, he raised the question of whether “irrational exuberance” might be pushing stocks higher. The implication was that the Fed wouldn’t want the bull market to reach “bubble” proportions--because if that bubble were to burst, the financial effect on the economy could be devastating.
The Dow was near 6,400 when Greenspan made those comments. It is now 1,500 points higher. Investors, it appears, haven’t particularly cared what Greenspan has thought about the level of stock prices. But when he acts--as he did with March’s rate hike--there is no question that people still pay attention.
