It doesn't look as if the
is going to cut rates at its meeting next week. Really.
Oh, you're forgiven for being a bit skeptical on that count -- lately the Fed has been playing Bud Abbott to everybody else's Lou Costello. But in his prepared testimony before the Senate's Budget Committee Thursday morning, Fed Chairman Alan Greenspan offered a downright upbeat assessment of the economy's prospects.
As a result, stocks rose Thursday morning as investors bought into the notion that the U.S. economy is well on its way to recovery -- a concept Greenspan himself seemed less than sure of only two weeks ago.
Guns of August
Though the economy has been in a recession worsened by the Sept. 11 terrorist attacks, "there have been signs recently that some of the forces that have been restraining the economy over the past year are starting to diminish, and that activity is beginning to firm," Greenspan told the august body.
Greenspan said the rapid inventory destocking induced by the downturn appeared to be over, which should boost industrial production. He said consumer spending has held up remarkably well, while recent reports suggest "some abatement in the rate of job loss."
The tenor of all this is different from the note struck in San Francisco two Fridays ago. Back then, the chairman's headline-grabbing remarks read, "Despite a number of encouraging signs of stabilization, it is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold."
Those remarks capped off a week's worth of chatter from various Fed officials suggesting that the fixed-income market had misjudged the pace of economic recovery. Until then, market participants (if not most Wall Street economists) had expected the Fed would stand pat at its two-day meeting next Tuesday and Wednesday.
But by the time Greenspan finished talking, the market had drastically adjusted its expectations on both Fed easing and the economy's prospects. At the close that Friday, the yield on the benchmark 10-year bond was at 4.86% -- 27 basis points below where it had been a week previous.
Who's on First?
Apparently, recent data, and perhaps the scorn that came from some quarters ("deranged" was how Northern Trust economist Paul Kasriel characterized Greenspan's position), changed the Fed's mind about things. Or, as Fed officials would say, Greenspan wasn't "wrong" -- he just got "misinterpreted."
This past Saturday
writer John Berry reported Fed sources as saying the market had "overinterpreted" Greenspan's message. Then
The Wall Street Journal
said Fed officials felt that the market had "read too much pessimism into their remarks."
"He said what he said," explains Morgan Stanley fixed-income strategist Kevin Flanagan. "It's as simple as that."
In recent days, Fed easing expectations have been drastically reduced. The fed funds futures, which at the conclusion of Greenspan's last speech were implying an 80% chance of a quarter-point cut at next week's meeting, now imply just a 10% chance of a cut.
"He decided to accentuate the positive and eliminate the negative," says Kasriel of Thursday's speech. "I would have to conclude that they don't want to ease at this next meeting."