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Let's see: The same day Alan Greenspan made the key distinction between economic

expansion vs. recovery, the House passed a stimulus package bill that looks likely to be approved by the Senate. Meanwhile, the dollar tumbled and bond yields jumped.

But I'm crazy to be worried about inflation?

OK, maybe I am crazy, or was so early arriving at the concerned-about-inflation party as to be rude. But rather than dwell on the past, let's look toward the future, or at least at the present.


today's testimony -- the second half of his semiannual report to Congress -- Greenspan said "recent evidence increasingly suggests that an economic expansion is already well under way." Additionally, the Fed has "seen encouraging signs in recent days that underlying trends in final demand are strengthening," although the Fed chieftain cautioned that the dimensions of the pickup "remain uncertain."

Greenspan offered a "far more confident characterization of the rebound than ... in his last visit to Capitol Hill" on Feb. 27, said Peter E. Kretzmer, senior economist at Banc of America Securities.

Like many market players, Kretzmer interpreted today's Greenspeak to mean the Fed is more likely to tighten interest rates. Fed fund futures upped the odds of a rate hike at the Fed's May 7 meeting to 50% today, from 37% previously. The December eurodollars future is forecasting the fed funds rate will approach 3% by year end vs. 1.75% currently,



Kretzmer expects the FOMC to begin raising rates by midyear, with a change in its assessment of the risks in the economy this month being "the first step in this direction."

Concerns about potential Fed rate hikes were cited as contributing to the stock market's weakness today. After trading as high as 10,606.88 and as low as 10,468.64, the

Dow Jones Industrial Average

closed down 0.5% to 10,525,37. The

S&P 500


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Nasdaq Composite

each lost 0.5% as well.

But what if, rather than planning to squash inflationary pressures, Greenspan actually hopes to foster them, as Paul McCulley, managing director and chief economist at PIMCO, recently mused.

Greenspan "wants aggregate demand to firm sufficiently for companies to be able to 'take back' prevailing price discounts," McCulley wrote at PIMCO's Web site. "That's the 'take back' that is on his mind, not the bond market's fear of a 'take back' of last year's easing."

McCulley cited comments by Greenspan in his Feb. 27 congressional testimony that "part of the reduction in pricing power observed in this cycle should be reversed as firming demand enables firms to take back large price discounts." The following day, he noted, during a speech before the Labor Department, Greenspan discussed savers' appetite for risk and the long-term outperformance of equities vs. "less risky" securities.

Simply put, "Greenspan wants stocks to outperform bonds in the quarters ahead, and he's willing to underwrite a cyclical increase in inflation to bring about that outcome," wrote McCulley, who was not available for additional comment.

Perhaps that mindset explains the stock market's relatively modest decline today, as well as the bond market's more dramatic reaction to the testimony.

The price of the benchmark 10-year Treasury note fell 1 9/32, to 97 11/32, its yield rising to 5.22%, its highest level since June 12.

Certainly, there's logic in Greenspan's presumptive desire for inflation to rise, so as to allow corporations to regain pricing power. McCulley's thinking jibes with my long-standing concerns about inflation and criticisms of Greenspan. But if the Fed is going to allow inflationary pressures to percolate, what effect is that going to have on mortgage rates, the lynchpin of the strong housing market on which the consumer's continued resilience is based?

In the last week, average rates on 30-year fixed mortgages rose to 6.87% from 6.80% while average 15-year fixed mortgages rose to 6.37% from 6.28%,

Freddie Mac


reported today.

Of course, Greenspan probably believes he can let inflationary pressure fester just long enough to help corporate America but not so much they cut off the economy's recovery ... er, expansion.

Managing that balancing act is the latest challenge the chairman has given himself.

Dollar Bill Y'all

The dollar fell as low as 126.40 yen today before recovering to 127.15 yen late in New York trading. Still, it was the yen's best one-day gain since October 1998. But the dollar's renewed weakness wasn't an apparent negative influence on stocks.

As noted

at midday, the question is: How long can the equity market's decoupling from the dollar (and the bond market) continue?

Tobias Levkovich, the

recently bullish U.S. equity strategist at Salomon Smith Barney, doesn't sweat the dollar's weakness.

"Once again, history is not on the side of the bears," he wrote, noting the great bull market of 1982-early 2000 included periods of both dollar strength and weakness. In addition, U.S. bond yields remain relatively attractive, "and thus we do not expect a mass exodus by foreign bondholders to drive up interest rates dramatically," which would negatively impact equity valuations.

In fact, a weaker dollar could "further stoke the

Dow Industrials' names as they become more competitive globally," Levkovich wrote, suggesting the same holds true for many paper, steel and chemical concerns, as well as auto and auto component makers. (

General Motors

(GM) - Get General Motors Company (GM) Report

rose 2.5% today after Merrill Lynch upped its recommendation to buy from neutral.)

Levkovich suggested the weakening dollar will likely be "another reason bears will throw up to fend off the improving-economy argument for domestic stocks." (

Who, me?

) But the strategist believes the rally will continue into May due to his expectation that companies will report better-than-expected first-quarter earnings.

Rather than a weakening dollar, Levkovich suggested the lone fundamental issue that could stop the rally would be a sharp increase in oil prices.

"Energy prices have climbed already on Mideast tensions

and still remain sharply down year-over-year but do bear watching," he wrote on a day in which crude futures rose 2.4% to $23.71.

As with aforementioned mortgage rates, crude prices remain low relative to historic levels. But the point is they are both heading in the wrong direction.

Interesting times, indeed.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.