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The Fed Chairman Hasn't Changed His Tune

Alan Greenspan tells a House committee that he's still down on deficits and high on a coming rebound.


debt debate resumed on Capitol Hill Wednesday, as

Federal Reserve

Chairman Alan Greenspan testified before the House Financial Services Committee. The budgetary implications of President Bush's proposed tax cuts were the major subject of the question-and-answer session that followed Greenspan's prepared remarks.

To his credit, Greenspan maintained what has been a fairly consistent stance: He supports tax cuts when there's a budget surplus and/or when they're "matched by cuts in spending." He opposes them when there's a deficit, because he believes deficits matter and do negatively impact interest rates.

Greenspan specifically and explicitly supported ending the so-called double taxation of dividends, and any tax cuts that "give incentives to capital formation." However, any benefit of cutting taxes would be "significantly undercut" if cutting taxes significantly increases the deficit, "which induces a rise in long-term interest rates," he said, stressing that the lion's share of academic research supports a link between rising deficits and higher rates.

In the sense that Greenspan offered some political capital for both Democrats and Republicans, but no clear "victory" for either, one could argue he did


right in his latest Capitol Hill appearance.

Then again, there was plenty of fodder for critics of the Fed chairman.

Cautious Optimism and Circuitous Logic

In his

prepared testimony, Greenspan basically reiterated what he's been seemingly saying for at least a year now: "I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that improvement remains uncertain."

In another version of the same concept, Greenspan admitted that "the future path of the economy is likely to come into focus only gradually," but stressed he's still upbeat about the "long-run growth potential of the economy."

If the economy doesn't begin to pick up steam soon, one would think market participants will start to question what David Rosenberg, chief North American economist at Merrill Lynch dubbed "a central bank's version of 'Waiting for Godot.' " At some point, "The Fed Chairman Who Cried 'Wolf'" might be a more accurate literary allusion.

Most troubling, the chairman cited "the consensus of economic forecasters is that a material rebound in economic activity will develop in the second half of this year," as one reason for his optimism.

Given Greenspan's own persistently upbeat comments about the economy's underlying strength and resiliency have no doubt contributed to those consensus forecasts, it's at best circuitous logic for the chairman to cite them. At worst, it's a sign of desperation.

This is eerily reminiscent of when Greenspan cited earnings estimates by Wall Street analysts to justify historically high equity valuations during the bubble (which he didn't publicly acknowledge until long after its bursting, and then to disabuse himself of any responsibility for its development.)

It's hard to say what, if any, impact Greenspan's testimony had on equity markets Wednesday. Major averages rallied to their intraday highs during the chairman's appearance, but sold off before his testimony concluded. Very likely, the delayed opening in shares of

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, which revealed more than $1 billion in additional accounting failures, had more of an effect on trading.

As of 2:49 p.m. EST, the

Dow Jones Industrial Average

was basically flat, at 8502.85, after having traded as high as 8523.72, the

S&P 500

was up 0.18% to 919.49 vs. its earlier best of 921.07, and the

Nasdaq Composite

was down 0.14% to 1469.23 after trading as high as 1472.20.

The Treasury market, which is more sensitive to Fed comments than equities, seemed to take heart in the chairman's comments that the Fed "clearly

has more room" to ease if necessary. The price of the benchmark 10-year Treasury was lately up 14/32 to 99 30/32, yield falling to 3.87%.

While only a small minority of participants believe the Fed will actually ease at its next policy meeting, "Mr. Greenspan's comments would suggest that he would go along with a vote to shift the risk directive toward slower growth on May 6," Merrill's Rosenberg opined.

Rosenberg acknowledged Greenspan's long-term optimism, but thought the chairman's overall tone was "less upbeat" than expected. Among the chairman's comments supporting this view included an observation that while households have become "somewhat less apprehensive about the economic outlook?businesses have not exhibited a similar improvement in tone."

Shortly after Greenspan's testimony began, the Chicago Purchasing Managers Index for April was released and reported down to 47.6 from 48.4 and vs. expectations for a slight increase. The new orders index fell to 44.6, the lowest level since December 2001. Such numbers "point to downside risk for" Thursday's Institute for Supply Management survey, Rosenberg wrote, hinting Greenspan might have "had a peek" at the ISM number.

Nothing the chairman said or didn't say seemed to be helping the dollar, which was continuing the weakness evident after midmorning Tuesday. Intraday Wednesday, the euro traded at a four-year high of $1.1148.

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