A spooked market spent much of the morning trying to decipher

Federal Reserve Chairman Alan Greenspan's

Humphrey-Hawkins testimony to the Senate Banking Committee.

Markets plunged as the prereleased text of Greenspan's speech was examined -- the

Dow

fell more than 100 points by 10:15. Quickly it rebounded more than 40 points and seemed to settle about 60 to the downside.

Though Greenspan's testimony included cautious comments about the market, many investors noted that many elements argue against an increase in short-term rates -- really the only weapon that Greenspan has to bring the stock market lower. Gold prices are low, inflation is modest, the dollar strong and the expansion steady. All of those ingredients have added up to steady monetary policy in the past, Fed watchers said.

Greenspan said that while inflation was subdued and the economy was in good shape, history reminded us that a downturn was inevitable.

"We cannot rule out a situation in which a pre-emptive policy tightening may become appropriate before any sign of actual higher inflation becomes evident," he said. He renewed his pledge not to act prematurely, but he said that the risk to the economic expansion posed by inflation would outweigh the advantages of waiting for more concrete evidence.

Repeating his previous rhetorical warning about irrational exuberance, Greenspan pointedly reminded investors that high asset prices were a potential threat to inflation, and, he added, underestimating risk in the financial markets could lead to dangerous imbalances.

"I think the speech was more of the same," said Jack Baker, managing director for stock trading at

Furman Selz

. "Greenspan was just firing warning shots across the market's bow. But he ended on a high note, and the powers that be are still in excellent shape and in the short term this will have no dramatic effect."

Baker said that the market will take the announcement in stride and that a correction will have to wait until earnings no longer meet expectations and inflation creeps into the picture. He expects that when bonds rally, the stock market should end the day on a positive note.

"Forces here indicate that stocks want to move higher. There's no reason to be bearish. Cautious yes, bearish no," he concluded.

With the

Consumer Price Index

stable, labor markets received the most scrutiny from Greenspan. The Fed chairman indicated that wages have moved higher and the prolonged expansion has contributed to some scarcity of labor in certain industries. But, he quickly added, productivity improvements have kept pace and businesses still find themselves unable to raise prices very easily.

By Amy Olmstead

aolmstead@thestreet.com