Can Fed's Greenspan Soothe the Markets?
July 14, 2002 08:38 AM ET
By Joanne Morrison
WASHINGTON (Reuters) - Alan Greenspan's twice-annual monetary policy speech never fails to draw attention, but with major U.S. stock indices beaten to five-year lows, Wall Street is hoping more than anything else that the Federal Reserve Chairman can halt the slide.
His testimony on Tuesday before the Senate Banking Committee, and then to the House Financial Services Committee on Wednesday, will come a week after President Bush tried to soothe markets cowering under a volley of accounting scandals by pledging a crackdown on corporate wrongdoing.
The president's message has thus far had little positive impact on markets, even after Senate leaders last week passed a bill to beef up policing of the accounting industry.
On Saturday, Bush called for a strong accounting watchdog as a new Time/CNN poll showed 72 percent of Americans think many companies are cooking their books and just 34 percent saw Bush's reform proposals, including hiking jail terms for corporate fraud, as tough enough.
"I was taken with the President's rhetoric ... But we need underlying substance as well if we are really going to address this problem. And there, I regret to say, I thought he fell short," said Senate Banking Committee Chairman Paul Sarbanes, a Maryland Democrat.
Twice a year Greenspan reports to Congress on the Fed's monetary policy, offering key insights into the Fed's take on the economy. But inflation and interest rates are not likely to be the chief concern among lawmakers and Wall Street players closely watching the first of the hearings, set for Tuesday, at 10 am (1400 GMT) before the Senate banking panel.
So far this year, the Wilshire Total Market Index, the broadest index for the U.S. equity market, has plunged about 18 percent and shed more than $2.4 trillion in market value, more than the gross national product of Germany.
"I'm really counting on Chairman Greenspan to put a floor on the stock market," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
"He's got a good reason to provide that ray of sunshine because the underlying economic numbers are healthy. The economy is not falling apart like the stock market," Sohn said.
There are some Fed officials voicing concerns about the stock markets, though. St. Louis Fed President William Poole told Reuters in an interview on Thursday that the tumble in equities was making the economic outlook murkier, although the real economy was doing "okay."
Poole said the stock market's prolonged sell-off was likely to slow or delay a recovery in business spending that officials at the central bank have said is key to building a solid, sustainable expansion.
"The big unknown here is business investment," he said.
INFLATION CONTROLLED
After 11 interest rate cuts last year intended to boost the economy out of recession, the Fed so far this year has opted to keep rates unchanged at 40-year lows.
And, with the recovery weaker than first expected and the much hoped-for rebound in business spending yet to materialize, inflation has remained tame, the latest data show. That gives the central bank ample time to delay raising rates.
That waiting room, economists say, is more crucial now than ever as tightening of monetary policy, or even a hint of it from the Fed, could deliver yet another blow to the hard-hit equity markets.
"I don't think the Fed is likely to do that until some of the wrinkles in this corporate malaise have been ironed out," said Richard Yamarone, economist with Argus Research in New York. He and others agree that many of the key underpinnings for economic growth are in place.
Consumer spending is still strong, with the Commerce Department reporting on Friday that retail sales, a major portion of total consumer spending that accounts for two-thirds of U.S. economic activity, rose 1.1 percent overall in June and a smaller 0.4 percent excluding cars.
"We've endured a lot considering all the things that are going wrong in corporate America and the consumer is still strong," Yamarone said. "As long as you still have a job, people are going to spend and it's just a matter of time until this corporate malaise is over."
Still, there were some signs that consumers were growing fearful about the future however. A monthly survey by the University of Michigan found July consumer sentiment at its lowest level since November 2001, and expectations for the next 12 months fell sharply as well.
A continued downturn in the stock market would eventually weigh not just on investors but also on consumers, wary they may face unemployment, economists say.
"They (Fed officials) are well aware that this is having a negative impact on spending," said Anthony Chan, Chief Economist at Banc One Investment Advisers in Columbus, Ohio.
The labor market, typically last to pick up in a recovery, has shown little improvement, with scant job growth, at best, over the past few months.
"This puts more pressure on Alan Greenspan to offset the negative tone we're observing in the equity market," Chan said. "Now he has to do it in a nonpolitical language."
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