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Market Lends Half an Ear to the Chairman's Speech

Stocks were moving on issues other than Alan Greenspan's speech on the economy and rate cut.
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Exactly one week after the

Federal Reserve's

unexpectedly large rate cut, Chairman Alan Greenspan appeared before the Joint Economic Committee of Congress to explain the deed. As usual,

the chairman's testimony generated rapt attention from committee members and extensive press coverage.

Somewhat unusually, the testimony fell mainly on deaf ears on Wall Street.

"The markets are so volatile, there's so much going on -- why should we have to parse every word and analyze every eyebrow movement from King Alan?" wondered Thomas McManus, equity portfolio strategist at Banc of America Securities. "He's just another guy who had it wrong. Another guy chasing the market." (In terms of getting it wrong, McManus referred to Greenspan's overly upbeat assessment of the economy last spring and summer, although that is far from the only evidence of the chairman's fallibility.)


Indeed, financial markets appeared to be paying little heed to Greenspan's appearance, focusing more on news of Iraq's acceptance of the United Nations disarmament resolution, earnings from


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and the latest developments in the scandal involving


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chairman Sandy Weill and former star analyst Jack Grubman.

As of 2:21 p.m. EST, the

Dow Jones Industrial Average

was up 0.4% to 8420.47 after having traded as high as 8493.51 and as low as 8298.68. The

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S&P 500

was up 0.2% to 884.52 vs. its earlier high of 892.51 and low of 872.05, while the

Nasdaq Composite

was higher by 0.9% to 1362.71 vs. its intraday best of 1371.70 and low of 1334.10.

Of course, that's not to imply there was no significance to Greenspan's testimony. When the chairman of the Federal Reserve speaks, people listen, especially when the subject is monetary policy and the economy.

On that note, Greenspan said "several forces have continued to weigh onthe economy," including geopolitical concerns, the fallout from corporate scandals and the stock market's slide. "Households have become more cautious in their purchases, while business spending has yet to show any substantial vigor" in part because of those factors.

However, Greenspan reiterated a belief that the economy has hit a "soft patch," but stressed that "we don't have the usual weaknesses that presage an economy going down in a cumulative manner."

Essentially, he painted a picture of an economy with a "very large degree of uncertainty" but one in which "there is no evidence ... at least up to the moment, that it is accelerating on the downside."

All in all, the testimony amounted to an explanation why the Fed cut 50 basis points last week rather than the 25 expected by most economists, and why the Fed Open Market Committee currently believes the risks to the economy to be balanced between forces that might cause inflation and those leading to further weakness.


Regarding the former, Greenspan essentially said the risks of inflation were so low that the Fed could well afford to take out an "insurance" policy against a steeper-than-expected economic downturn. If growth picks up as the Fed expects, that insurance could be "reversed quickly" in the form of rate hikes, he said.

Those comments came during the question-and-answer segment and as part of a larger discussion over whether the Fed sees much

risk of deflationary pressures. Echoing (almost exactly, as if they were reading from the same script) the comments of vice chairman Roger Ferguson on Tuesday, Greenspan said the risks of deflation are remote at present.

"We have seen no evidence at this point that we are close to or in danger with respect to deflation," Greenspan said. But the chairman stressed the central bank would be vigilant for signs of deflationary pressures, as did Ferguson, acknowledging "we cannot allow that to creep up on us unseen."

Furthermore, Greenspan said the Fed would be aggressive in combating any signs of deflation -- in the unlikely event of their emergence -- and stressed the central bank has other tools beyond setting rates to combat such a development, including the purchasing of Treasury securities via open market operations.


ing 'the Fed has its head in the sand' or is downplaying deflation is punk," said James Padinha, economic strategist at Arnhold & S. Bleichroeder in Los Angeles. "They've laid it all out and said 'we've studied it, we don't see it

but if we're wrong there are things we can do and we'll do 'em.' For the first time in the last 10 to 12 years the Fed seems to be doing exactly the right thing, and that's refreshing."

Refreshing, yes, but a little boring too, Padinha joked, perhaps explaining the market's rather muted reaction to the testimony.

"The Fed chairman said strong things about deflation, but it didn't move stocks," he said. "What ended up moving stocks was the Iraq thing.

Apparently, participants weren't really sitting around torn about the deflation debate."

Neither, it seems, were fixed-income participants, as trading in Treasuries also seemed be dictated more by geopolitical concerns than by whatever Alan Greenspan had to say. Of late, the price of the benchmark 10-year Treasury note was 1/32 to 101 9/32, its yield falling to 3.84%.

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.