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Strategies & Market Trends : Market Gems-Trading Strong Earnings Growth and Momentum -- Ignore unavailable to you. Want to Upgrade?

To: golfnut777 who wrote (4286)	2/11/2001 8:43:47 AM
From: 2MAR$	Read Replies (1) \| Respond to of 6445

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 * end of story *