Federal Reserve Chairman Alan Greenspan is likely to give an upbeat view of the economy Wednesday when he delivers congressional testimony that is anxiously awaited by financial markets.
Greenspan’s semiannual report to Congress will mark his first public comment since the central bank sent a ripple through financial markets last month by eliminating its promise to keep interest rates low for a “considerable period.” The modest change in wording of the Fed’s policy statement left some traders puzzled about what it will take for the central bank to begin raising rates from their current, historically low levels.
“I trust that the Fed chairman will come up with a lot of news because the market really needs guidance,” said John Silvia, chief economist at Wachovia Securities. “I think the market needs to have some kind of understanding about what are the Fed’s goals as far as inflation and unemployment.”
Greenspan often uses the semiannual congressional testimony as a platform to clarify the central bank’s views on the economy, or, occasionally, to express personal opinions. When he delivered the Fed’s last report to Congress in July, he sent bond interest rates sharply higher by saying the central bank was “unlikely” to resort to non-traditional means of boosting growth, such as buying Treasury bonds.
In his testimony a year ago, Greenspan lectured Congress on the need for fiscal discipline and tossed a dart at President Bush’s tax-cut proposal, saying he was not convinced of the need for additional stimulus.
Both stock and bond prices frequently move sharply on days when Greenspan testifies to Congress. A year ago major market indexes lost 2 percent over the two days of Greenspan’s congressional testimony.
On average long-term Treasury bond prices move about a point in either direction on the day Greenspan delivers his report, said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., who analyzed figures over the past decade. That is an unusually large one-day move, but even more interesting is that the market tends to move strongly in the same direction for the next several weeks, according to the analysis.
Crescenzi said Greenspan will try to walk a fine line Wednesday for fear of triggering concerns about a near-term rate hike. Few analysts expect the Fed to hike rates before midyear, and many think the central bank will stay on hold until 2005.
“He is bound to sound optimistic about the economic outlook, but the other side is he will look to balance his optimism to show the bond market that the Fed is in no hurry to raise interest rates, that they are willing to be patient,” Crescenzi said.
The low rates, coupled with last year’s tax-cut package helped spur the best growth in nearly 20 years in the second half of 2003. Economists generally expect strong growth to continue this year, although so far there has been little evidence of the type of job growth that normally would be expected.
In an interview on CNBC Monday, White House economic adviser Gregory Mankiw acknowledged a discrepancy in the government’s two most closely watched employment reports. The payroll job figures, which are closely watched by financial markets, have shown weak growth over the past five months. Meanwhile the separate household survey has shown much stronger growth, including a drop in the unemployment rate to 5.6 percent from a peak last year of 6.3 percent.
“No one quite understands why the two surveys have a discrepancy,” Mankiw said. “But both are saying that the labor market is heading in the right direction. and most forecasts, as well as ours, suggest that we will continue heading that way.”
Mankiw, chairman of Bush’s Council of Economic Advisers, submitted a report Monday projecting that the economy will add 2.6 million payroll jobs this year, a reversal from the 2.3 million jobs that have been lost since President Bush took office.
David Littmann, chief economist for Comerica Bank, said that based on his forecast, Greenspan has every reason to be optimistic Wednesday.
“2004 is likely to be the best expansion year in this cycle,” he said. The past two quarters of strong growth should spur businesses to begin hiring, and the global economy finally has begun a “synchronous” expansion he said.
“In my forecasting career, I have never seen such a confluence of stimulative monetary and fiscal policies,” Littman said Tuesday in a speech accepting an award for the accuracy of his economic forecasts over the past four years.
Littmann expects the nation’s gross domestic product to grow 4.6 percent this year , which would be the fastest pace in 20 years. But after 2004 he expects growth to slow sharply as the Fed raises interest rates, sapping consumer confidence and potentially sending the stock market lower.
“As I see it the Fed simply must start moving interest rates higher,” he said. “They are willing to wait this year because of the election. But they will have to move aggressively later.”