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To: Les H who wrote (10892)	7/27/2004 10:50:35 AM
From: Les H	Read Replies (1) \| Respond to of 29597

Will Greenspan slam the brakes? ON the face of it, things look good. Last week, US Federal Reserve chairman Alan Greenspan reiterated to US lawmakers that the US economy continues to track a sustained growth path, and that US monetary policy accommodation will only be removed at a measured pace. Despite that, there is a distinct absence of exuberance in financial markets. The most obvious explanation is that Fed-watchers detected a slightly more hawkish tone in Mr Greenspan's testimony, which went beyond his usual caveat that the Fed will not hesitate to act if inflationary pressures pick up. In particular, analysts zeroed in on two unusually blunt warnings from the Fed chairman - which appeared to brush aside recent weak US numbers favouring less rate hikes, rather than more. First, the Fed chairman cautioned that we may yet suffer the effect of ''deep-seated forces'' arising from a prolonged period of generous policy accommodation since 2001. Second, he remarked that some of the handsome gains made in US dollar debt market instruments over the past three years will be reversed once US monetary policy returns to a more neutral footing. Analysts have drawn two immediate conclusions. First, that another US rate hike is an all but done deal when the Fed's interest rate committee next meets on Aug 10. And second, that US bond yields are headed higher. Indeed, the US dollar and bond yields have already moved higher. Yet, to balance things out, it is also possible to make the case that the same ''deep-seated forces'' which Mr Greenspan mentioned could also limit the pace and extent of US rate hikes, going forward. In this respect, we refer to the undeniable boost to US asset prices arising from the Fed's ''prolonged monetary accommodation'' - which brought short-term US interest rates down to their lowest point in more than four decades. Specifically, this policy - coupled with generous tax cuts - played no small part in cushioning Wall Street's fall from its early 2000 highs, and its subsequent recovery since late 2002. It may even have created another asset bubble to replace that seen in US stock prices - namely the tremendous explosion in US house prices. Lurking behind the headline news, we detect a degree of financial market discomfiture about both Wall Street stock indices and US housing prices. For example, recent flow data revealed a record outflow of US$23 billion from US equities between March and May 2004, compared to a net inflow of US$2 billion when the Fed last tightened in 1994. House prices to tumble? In a recent article, BusinessWeek warned how vulnerable US house prices have become to higher US interest rates, given that the ratio of house prices to median family income is now a lofty 19 per cent above its 1975-2000 average. If 30-year US mortgage rates rise just one per cent, it's estimated that house prices must fall 11 per cent to keep new buyers' monthly payments constant. Among existing homeowners, while those with fixed-rate mortgages will be cushioned, the many who depend on cheaper short-term variable rate financing will be vulnerable, and many will be already feeling the pinch: annual borrowing costs since late March have risen by some 25 per cent. All things considered, therefore, while tapping on the monetary brakes would be quite understandable, slamming the foot down is another thing altogether. It's not something a cautious Fed chairman like Mr Greenspan is likely to do.