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Either Alan Greenspan isn't ready to fade out of the public arena, or the public won't let him. Whatever the case, the now-retired Chairman of the

Federal Reserve

was making headlines Wednesday after he reportedly appeared at a private conference of high-profile investors in Manhattan on Tuesday night.

At an event organized by Lehman Brothers, "Greenspan reportedly was upbeat on the economy, negative on housing and seemed to warn of the risk of more Fed tightening than the market expects," wrote

contributor Marc Chandler.

Greenspan went on to say that stubbornly low long-term rates were limiting the Fed's ability to manage the economy, according to one source quoted by


. Low long-term bond rates, which are used to set mortgage rates and refinancing rates, are still leading homeowners to borrow against the value of their homes to finance their spending, the former "Maestro" reportedly said.

Bonds declined and their yields, which move inversely to price, rose after the reports. The benchmark 10-year Treasury bond fell 5/32, and its yield rose to 4.59%. That yield, however, is still roughly were it was when the Fed began raising rates back in June of 2004.

Signs of cooling in the housing market were again confirmed Tuesday after

Toll Brothers


said that orders from new homes had dropped steeply in its first fiscal quarter.

Greenspan's surprise appearance and comments might be seen as undermining the authority of Ben Bernanke, who was just sworn in as the new Fed chairman on Monday. "I don't know what Bernanke is going to make of all this," says John Lonski, senior economist at Moody's. "But since it was supposed to be a private meeting and somebody seems to have leaked the news, then it's hard to pin blame on Greenspan."

According to Tony Crescenzi, interest rate strategist at Miller Tabak and a


contributor, Greenspan's comments are fairly consistent with what transpired from the statement accompanying the Fed's last rate hike, on Jan. 31. The comments "will be dwarfed" in significance by Bernanke's testimony to Congress on Feb.15, Crescenzi predicts.

Even now that he is freed from the constraints of being the most powerful central banker in the world, Greenspan still managed to remain unclear and elusive about just how much further rates would have to rise.

At Greenspan's last official meeting, on Jan. 31, the Fed hiked interest rates to 4.50%, and it disappointed the market by sounding less committed to ending rate hikes than it had back in December.

A series of strong economic data has since seemed to convince market players that the Fed would have to tighten beyond the one additional rate hike which the market was expecting on March 28. A March hike would take the Fed funds rate to 4.75%, but market odds that this rate would reach 5% by the end of June had been steadily rising, reaching 70% on Tuesday.

It's hard to say whether Greenspan was suggesting that the market should expect more than 5%. But after reports of his appearance, odds of a 5% Fed funds rate by May 10 rose to about 56% from 44% previously, while odds that this rate would be reached by June 29 rose to 82% from 70%.

"The prudent investor, based on the available evidence

including Greenspan's latest comments would look for Fed funds rate to peak at 5%," says Lonski. "But the message is that in the end, monetary policy is a dynamic process and if the economy indeed proves to be stronger than expected, then rates will peak above what the market currently expects."

Stocks, meanwhile, seemed unconcerned about Greenspan's comments. After declining Tuesday, major stock indices surged Wednesday after upbeat earnings and guidance from



Tuesday after the close.


Dow Jones Industrial Average

gained 108 points, or 1.0%, to 10,858. The blue-chip index was also boosted by a 5.7% gain in



, which said it's considering selling its consumer-products unit.


S&P 500 index

rose 0.9% to 1265, and the

Nasdaq Composite

gained 1.0% to 2266.

Maybe investors are also catching up on the idea that the Fed continuing to raise rates is a sign that economic and profit growth should remain healthy for the time being.

According to Lonski, economic growth might post a very strong rebound to 5% to 6% in the first quarter after a surprise drop to 1.1% in the fourth quarter. Similarly, he expects productivity, which showed a surprised drop in the fourth-quarter, was an anomaly that should be followed by a strong rebound this quarter.

Such an outcome should continue to play of favor of aggressive growth investment strategies, such as small-caps, contradicting the calls of many strategists that a slowing economy will benefit safer large-cap companies.

Then again, the market had already been ignoring those investment calls, as the

Russell 2000 index

of small cap stocks already surged 9% in January, compared with the S&P's 2.6%. Small caps, meanwhile, have struggled along with the broad market since the beginning of February and the Russell underperformed Wednesday, rising 0.6%.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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