Aaron Pressman

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Greenspan Sticks to Script

Aaron Pressman

Updated from 2:16 p.m. EST

For those who have kept predicting that the Federal Reserve would signal a pause in its interest rate hikes at the next meeting, in the next speech or at the next congressional appearance, they'll have to extend their prediction once more after Chairman Alan Greenspan gave no such signal.

If anything, at the margin, Greenspan's tone in congressional testimony on Wednesday possibly signaled more hawkishness -- a little greater disposition to raise rates -- than some market players expected. While many believe the Fed will pause soon, perhaps after another hike or two, Greenspan said that the central bank's fed funds rate, even after six rate hikes, "remains fairly low."

And while pretty sanguine on inflation, Greenspan warned that higher oil prices and a weaker dollar eventually could push up prices more broadly. Asked during Q&A about the Fed's stated policy to raise rates at a "measured" pace, the best answer Greenspan could offer was that the phrase wouldn't be kept "in perpetuity."

Stocks barely moved on Greenspan's testimony but the slightly hawkish tilt prompted Treasuries to sell off. The Dow Jones Industrial Average finished down less than 3 points to 10,834.88. The S&P 500 closed up fractionally to 1210.34, and the Nasdaq Composite, down 0.2% at 2087.43, also was nearly unchanged.

The price of the benchmark 10-year note was down 15/32, its yield rising 6 basis points, or hundredths of a percentage point, to 4.16%. That's less than the average move of 9 basis points on Greenspan's first day of testimony over the past five years, according to Lehman Brothers.

Greenspan's marginal shift helped the dollar, which rallied earlier this year on speculation that the Fed might accelerate its rate hike campaign. The greenback rose to over 105.5 yen and the euro fell to $1.2971 on Greenspan's initial testimony. By the end of the day, the dollar sold off some and was quoted at 105.24 yen while the euro rose to $1.3039.

For the big picture, though, Greenspan added little. "There was nothing by way of news in this testimony," Economy.com's Haseeb Ahmed, senior economist, wrote Wednesday.

Some bearish analysts had expected that Greenspan might try to talk down long-term rates to reduce the stimulus provided by loans linked to those benchmarks. He did no such thing, even going so far as to say the low level of longer-term rates could not be explained.

"For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum," Greenspan told members of Congress. "Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience."

During Q&A with senators, Greenspan further sought to dismiss one of the theories that caused bonds to trade off earlier this year.

Central banks, especially in Asia, were big buyers of Treasuries last year as they sought to recycle dollars they earned by selling to U.S. consumers and keeping their currencies in check. Signs that those purchases were slowing or might even reverse spooked some investors but Greenspan would have none of it.

"The notion, however, that came out a couple of weeks ago that there was a significant move toward selling off U.S. dollar instruments by foreign central banks actually was not accurate. The extent of holdings remains very heavy for dollars," Greenspan said, according to Bloomberg News.

The most recently released minutes of the FOMC, from its December meeting, said that some unnamed members of the committee were growing concerned that the period of low rates had sparked "potentially excessive risk-taking in financial markets," such as real estate, initial public offerings and corporate bonds.

Greenspan didn't reveal himself to be a supporter or dissenter of the coalition of the worried. Perhaps mindful of how his 1996 "irrational exuberance" statement had a brief but only temporary effect on stocks, he took a more moderate position in his testimony.

"History cautions that people experiencing long periods of relative stability are prone to excess," Greenspan said. "We must thus remain vigilant against complacency."

The maestro's statements on one of the hot-button political topics of the day -- Social Security reform -- also were muted. He didn't call the current situation a crisis and discussed the retirement insurance program only in the context of the government's entire range of coming fiscal problems.

In his typical understatement, Greenspan said the Social Security and Medicare programs "threaten to strain the resources of the working-age population in the years ahead. Longer-term problems, if not addressed, could begin to affect longer-dated debt issues."

And although he endorsed generally the creation of private accounts that could be invested in stocks, he pointedly rejected calls to move as quickly as possible.

"If you are going to move to private accounts, which I approve of, you have to do it in a cautious, gradual way," Greenspan said during Q&A. "I think it's a good thing to do over the longer run [but] all in all, I'm glad we're going to move slowly and test the waters."