Updated from 11:00 a.m. EST
stuck to his usual script today in his much-anticipated speech, discussing fiscal challenges that the new Bush Administration will face and only opaquely referring to the current performance in the economy. It gives very little guidance as to what the Fed will do at its meeting next week.
However, in a response to a question by Senator Paul Sarbanes, Greenspan said that the economy is "very close to zero growth at this particular moment. We know the fourth quarter was a very small positive, but there is an inventory liquidation process going on." Treasury prices, which initially sold off in response to his prepared remarks, rallied after these comments.
Yields (which move opposite to the price) on two-year Treasury notes, which trade based on expectations of future Fed activity, moved up to 4.91% initially. But after these comments, the market rallied, and two-year notes were lately at 4.77%, because his comments seem to support current market sentiment, that the Fed will cut by 50 basis points next week. Yields this low already factor in several additional moves from the Federal Reserve.
Most of the rest of the questions focused on tax cuts and fiscal policy. In his speech before the
Senate Budget Committee
, Greenspan repeated his mantra that he has sounded time and again before Congressional committees -- he supports reducing the federal debt, is supportive of tax cuts and isn't supportive of increased spending at the federal level.
The speech contained no new positions for Greenspan; he makes clear his support for tax relief, although cautions that using tax cuts to fine-tune the economy isn't very easy, citing his experiences during the Ford Administration, when tax cuts, when finally enacted, were too late to counteract a recession that had already ended.
"In today's context, where tax reduction appears required in any event over the next several years to assist in forestalling the accumulation of private assets, starting that process sooner rather than later likely would help smooth the transition to longer-term fiscal balance," he said in his
remarks. "And should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good."
Not all are sure a 50-point cut is in the offing. "Greenspan is too much of a rational human being," said Mike McGlone, vice president in trading at
Aubrey G. Lanston
. "He provided 50 earlier in the year, and if his goal was to make sure the bursting bubble didn't get excessive, that's been accomplished. Going 50 risks going too far, too soon."
Even if the Fed cuts rates by only 25 basis points, that's still 75 basis points in a month, which is quite aggressive for the Fed. In 1991, the Fed cut rates by 75 basis points to 6.25% between Jan. 9 and Feb. 1, and it hasn't been that aggressive since. Most economists, along with the markets, still expect additional moves in the next few months.
But they won't get an answer until next week. The market is going to have to be content with analyzing the recent speeches of other Fed officials, which acknowledge significant weakening in the economy.
-- Associate Editor Justin D. Lahart contributed to this story.
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