Greenspan to give prognosis on economy on Tuesday
By Marjorie Olster
NEW YORK, Feb 11 (Reuters) - The last time Federal Reserve
Chairman Alan Greenspan offered up his twice-yearly testimony
to lawmakers on the U.S. economy, it could have been summed up
as a mid-summer night's dream.
This week, it will be more like the winter of discontent.
When he last delivered monetary policy testimony in July, a
string of rate hikes appeared to be slowing the booming U.S.
economy to a healthy but more manageable pace, inflation was
tame, and Greenspan in 2000 was about as popular as the Beatles
in 1964.
But when the venerated Fed chief presents the testimony
that used to be known as Humphrey Hawkins to the Senate Banking
Committee on Tuesday, he will probably be forced to repeat what
had to be a painful admission for him several weeks ago -- that
the economy has ground to a near standstill.
Greenspan will also face angry Democrats who felt slighted
when he gave a green light to tapping huge budget surpluses for
tax cuts in his last appearance on Capitol Hill on Jan. 25.
That gave a major boost to Republican President George W.
Bush's plan for $1.6 trillion in tax reductions.
Though fiscal policy dominated last month's hearing before
the Senate Budget Committee, most expect it to be a secondary
theme on Tuesday with the focus squarely on the economy.
PUT ON A HAPPY FACE
Greenspan may try to put a cheery face on fears that the
economy might be slipping into recession, stressing instead the
good chance of a rebound in the second half of the year.
"I think there will be a good deal of emphasis given to the
longer-range turnaround," said David Resler, chief economist at
Nomura Securities International in New York. "This too shall
pass -- that's the Fed's view."
As he did in late January, the Fed chief will probably stop
short of saying the country has slipped into a recession,
loosely defined as two straight quarters of contraction in
gross domestic product. He did admit though that economic
growth was probably "very close to zero."
The economy expanded at a paltry 1.4 percent annual pace in
the October-December quarter and a number of Wall Street firms
are forecasting flat growth or a contraction in this quarter.
But if the economy does eke out a positive number for
growth this quarter, the expansion will have crawled to the
finish line of an unprecedented 10 years of unbroken expansion.
LANGUAGE OF RISKS
Investors will be closely following Greenspan's testimony
on Tuesday for any hints on future interest rate moves.
The Fed usually couches economic diagnoses in the language
of risks and Greenspan is unlikely to stray from that formula.
Since December, the Fed has seen the chief threat to the
expansion as excessive weakness rather than inflation.
Greenspan will likely cite the same problem areas
identified in statements issued by the Fed after it cut key
rates by a total of a full percentage point in moves on Jan. 3
and Jan. 31.
The manufacturing sector has contracted for six consecutive
months and businesses are laboring to reduce inventories due to
falling demand. Consumer confidence has weakened and high
energy prices are depressing consumer and business spending.
In its Jan. 31 statement on the rate cut, the Fed said the
circumstances called for "a rapid and forceful response" --
very aggressive language for the cautious Fed, which sent a
signal to investors that central bankers were not going to drag
their feet if more needed to be done.
Many investors believe another cut is in store at or before
the next Fed meeting on March 20, but they will look to
Greenspan's testimony to gauge how bold that move might be.
"Probably he will try to be very balanced and repeat many
of the themes from the Jan. 25 appearance -- that we are in
what is largely an inventory-related correction although there
are risks that it could turn into something worse, and that the
long-run outlook is still very favorable because of all the
productivity trends," said John Youngdahl, a Fed-watching
economist at Goldman Sachs in New York.
Financial market conditions have improved somewhat since
the Fed rate cuts. Private credit markets have loosened up as
lower interest rates increased investor appetite for riskier
debt securities like junk bonds.
The stock market is a different story. The S&P 500, a broad
measure of the market, has fallen about 4.0 percent so far this
month while the Nasdaq, a barometer of volatile technology
stocks, is down about 12 percent for the same period.
With the economy slowing, inflation has become a
less-pressing concern at the Fed, leaving a clear path for more
rate cuts.
FISCAL MINEFIELD
Though the Fed chief may face tough questioning on the
economic slowdown, the more contentious issue will probably be
his fiscal policy views.
Greenspan landed himself in the middle of a political
minefield in January when he offered a rationale for tax cuts.
Many Democrats opposed Bush's tax cut plan and had been
counting on Greenspan to reiterate what he had said in prior
discussions, that paying down the debt should be the first
priority and tax cuts the second.
Though some observers said Greenspan had flip-flopped,
Nomura's Resler said the shift was simply a response to the
rising projections for budget surpluses over the next 10 years.
Greenspan highlighted some problems that wiping out the
debt too quickly could pose such as disruption of capital
markets and the prospect that the government may accumulate so
much money, it might have to invest in private assets.
Greenspan, who believes governments should try to avoid
meddling in free markets, expressed distaste for that idea.
Resler said federal debt serves important functions in the
marketplace and he hoped to hear more discussion about it.
"Everybody in Washington pays homage to this great god of
reducing the debt. Is that really the optimal thing?" he said.
"Everyone who invests in Treasury securities would have an
enormous problem."
(--U.S. Financial Markets desk, 212-859-1845))
REUTERS
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