Greenspan Sends Treasuries Packing

An emphasis in Humphrey-Hawkins on the possibility that the Fed will hike again next month reinvigorates the bears.
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Treasury prices have turned down sharply, lifting yields to their highest levels in a week and a half, in response to

Fed

Chairman

Alan Greenspan's

emphasis in his

Humphrey-Hawkins

testimony on the possibility that the central bank will raise interest rates again at its next meeting on Aug. 24.

While suggesting that the release between now and then of market-friendly economic data could forestall another rate hike, Greenspan also repeated, word for word, the remarks from his June 17

testimony before the congressional

Joint Economic Committee

that he used to prepare the market for the Fed's June 30 rate hike: "When we can be preemptive, we should be, because modest preemptive actions can obviate more drastic actions at a later date that could destabilize the economy."

Equally importantly, he said that the Fed, when it hiked the fed funds rate to 5% from 4.75% on June 30, "did not believe that its recent modest tightening would put the risks of inflation going forward completely into balance."

The benchmark 30-year Treasury bond, which was trading up slightly ahead of the release of Greenspan's text, was lately down 1 2/32 at 89 26/32, lifting its yield 8 basis points to 5.99%, the highest level since July 11. Shorter-maturity note yields were underperforming, their yields 12 basis points higher on the day.

In the speech, Greenspan talked at length about the accelerated pace of productivity growth, and its potential to continue to accelerate, enabling the economy to grow at an above-trend pace without putting upward pressure on wages and prices. Those comments will surely embolden those who are predicting that the Fed won't raise rates again without clear evidence of rising inflation.

But he also sounded more than enough cautious notes to further embolden the bond bears, as this morning's price action clearly suggests.

"While product prices have remained remarkably restrained in the face of exceptionally strong demand and expanding potential supply, it is imperative that we do not become complacent," Greenspan said, adding: "The already shrunken pool of job-seekers and considerable strength of aggregate demand suggest that the Federal Reserve will need to be especially alert to inflation risks."

Deeper into the speech, he said: "However, when productivity is accelerating, it is very difficult to gauge when an economy is in the process of overheating."

Greenspan was not as clear as he might have been on the question of whether the neutral policy bias adopted by the Fed at its June 30 meeting was intended to apply only to the intermeeting period, or whether it had implications for the Aug. 24 meeting. But his comment on the subject seemed to favor the first view. Fed policymakers "did not want to foster the impression that

they were committed in short order to tighten further," he said.