Which way will he go?

That's the question on investors' minds this week as

Fed Chairman

Alan Greenspan prepares to climb Capitol Hill to deliver his semiannual speech on the economy and monetary policy -- the speech casually known as

Humphrey-Hawkins.

It looks like the answer, as it so often is with the venerable chairman, will be: He'll go just enough in every direction to leave the markets groping and his policy secrets intact.

Investors are hungry for an indication of how the next meeting of the

Federal Open Market Committee is likely to come out. Will the committee hike the

fed funds rate for a seventh time to keep pressure on the economic growth rate? If so, is that likely to bring the tightening cycle, which began in June 1999, to an end? Or, will it leave the rate unchanged at 6.5%, on information and belief it may already have done enough to ensure a slowdown, and that any additional action would run the risk of pushing the economy into recession?

At the moment, the

fed funds futures market is pricing in more-or-less even odds of a rate hike Aug. 22. Assuming that the other financial markets are similarly torn -- an assumption that may be safer about the bond market than about the stock market -- unless the Fed chairman can manage to be perfectly evenhanded, we may be in for a wild ride.

Any sign that the FOMC is mulling the possibility that enough is enough could unleash big rallies. (That's the take at

Merrill Lynch

, which believes the hiking cycle is over.) Similarly, if the speech takes a notably skeptical tone, we'll likely see lower asset prices. (That's the

Morgan Stanley Dean Witter

view; the firm forecasts a 7% fed funds rate.)

Neither outcome would be particularly surprising to veteran watchers of this semiannual event. No one can predict what the Fed chairman is going to say, but it's a fairly safe bet that whatever he says will trigger major market moves. More often than not, that's what happens.

"When we look back in history at the biggest days in the fixed-income market, a lot of them are Humphrey-Hawkins days," says Ethan Harris, senior economist at

Lehman Brothers

. "This can move the market more than an

employment report.

"This is the one speech Chairman Greenspan makes every year where he really has to stare monetary policy in the face and say something," Harris continues. "Even if he's trying especially hard to be as neutral as possible, it's likely he will give some kind of direction to the markets."

The Master of Inscrutability at Work

Still, most market analysts -- regardless of their forecasts for the fed funds rate -- expect Greenspan to do the very thing Lehman's Harris says he can't: Maintain the sense that anything can happen at the FOMC's Aug. 22 meeting, depending on what key economic releases between now and then indicate about how the economy is responding to higher short-term interest rates.

"My expectation is that he's basically going to recap what was in the Fed statement at the end of June," says Marc Wanshel, financial economist at

J.P. Morgan

, referring to the June 28

announcement of the outcome of the last FOMC meeting. "I think it'll be an on-the-one-hand, on-the-other-hand kind of speech: There are signs of moderation in growth out there, but they are tentative. Rising productivity has been holding down price pressures, but growth in demand continues to outstrip growth in supply, so the risk of an acceleration in inflation remains."

So, is the economy coming in for a soft landing after a year of hikes? The markets rallied hard when the

Census Bureau

reported that

retail sales

had fallen for the second month in a row in May. But a month later, that conclusion was revised away. Retail sales actually registered respectable gains in both May and June. Inflation has been largely confined to energy prices -- the large rise in the

Consumer Price Index

in June, reported yesterday, was driven by a 5.6% gain in energy prices. Those might lead other prices higher, but they also put a damper on consumer spending on things other than gasoline.

At 2.4%, the core rate of inflation (which excludes food and energy prices) is still low by historical standards. But it's faster than the rates that prevailed last year. Meanwhile, the labor market remains extremely tight, and the FOMC has

made clear it won't rest till that's no longer the case.

Why Spark a Rally?

Even if Greenspan believes no further rate action will be necessary, Fed watchers wonder what he'd have to gain from saying so. Big rallies in the stock and bond markets would only stimulate the economy, and Greenspan knows full well the weight his words carry on Wall Street.

If there's a basis for hoping that any surprise from the speech will be on the dovish side -- implying that the tightening cycle is over -- it's the tone of Greenspan's recent speeches (the July 11

discourse in particular), in which he's rhapsodized about the potential for a higher rate of noninflationary growth thanks to rising productivity,

Wrightson Associates

chief economist Lou Crandall says.

"We don't think his recent New Economy speeches have any Fed policy implications, but many market participants viewed them as friendly -- and Greenspan knew that they would," Crandall says. "The fact that he has been willing to stress his productivity optimism in spite of this -- and hasn't felt the need to hedge his remarks with heavy-handed warnings about near-term pressures -- has to be taken seriously."

Seriously, but with this caveat: When Greenspan delivers the Humphrey-Hawkins testimony, he's not really Greenspan. He's the voice of the FOMC, which

harbors hawks and doves alike. "He's trying to represent the view of the committee," Lehman's Harris observes. "So he tends to be more hawkish than he actually is."

Ch-Ch-Ch-Ch-Changes

Oh, and another thing: It doesn't matter, Fed watchers say, that this isn't a bona fide Humphrey-Hawkins address. The 1978 Humphrey-Hawkins legislation that required this appearance on Capitol Hill by the Fed chairman expired earlier this year. While legislators fight over a successor bill, the basic practice continues, like a common-law marriage. The Greenspan Fed, which has taken numerous steps to make monetary policy more transparent, isn't likely to clam up about it just because it has an opportunity to do so.

The only real change that Fed watchers consider likely is suspension of the practice of forecasting growth rates for the

money supply -- a relic from the days when monetary policy was geared toward achieving a certain money-supply growth rate. "The FOMC might choose to keep the targets of its own accord, but that seems very unlikely," Crandall told clients earlier this week.

Meanwhile, Morgan Stanley senior economist David Greenlaw raises the point that in an election year, the question-and-answer session that follows the speech "will probably be even less enlightening than usual," as senators "attempt to have Greenspan take their party's position on various fiscal policy proposals."