Greenspan to Walk Tightrope

Return to Normalcy

As Greenspan takes the stage on Wednesday to deliver the first of his semiannual congressional testimonies on the state of the economy, investors will be looking for signals as to the next phase of the return to normalcy. The consensus crowd thinks he may hint that the schedule of rate hikes is headed for a pause, aka the 'Goldilocks scenario.' Meanwhile, a minority of economic bears and Cassandras see the possibility of more hikes than the market anticipates.

"The market is still essentially priced for the Fed to be on hold from midyear, and the extent to which this view is confirmed or refuted by the Chairman's remarks will probably be a key determinant of whether the current rock-bottom level of intermediate- and longer-term rates is sustainable," Morgan Stanley analysts Ted Wieseman and David Greenlaw noted on Monday.

Given the strength of the current consensus and the modest rate hikes anticipated in the futures markets, the analysts preach caution.

"The greater risk to the market from the testimony would certainly seem to be a relatively more hawkish message from Chairman Greenspan," Wieseman and Greenlaw add.

But most commentators are expecting much less.

Larry Horwitz, senior industry economist at Decision Economics, predicts little news, at least on monetary policy, at the hearing. "The Fed is apparently comfortable with the near-term path of inflation and the real economy," Horwitz wrote. If any news is to be forthcoming, it likely would be on other topics raised by members of Congress during Q&A, when Greenspan's answers can be "quite illuminating and occasionally surprising," he noted.

Last time Greenspan showed up for the testimony formerly known as Humphrey Hawkins, back on July 20, he didn't make many waves, consistent with Horwitz's predictions for the upcoming session.

Economic conditions appeared "quite favorable" and inflation was growing but not threatening, Greenspan said in his testimony. The Fed already had signaled in the statement after its May 2004 meeting that it was planning to start raising rates soon, so the big news already was out of the bag. The S&P 500 finished the day at 1108.67, up just 0.7%.