Will Greenspan Show a Little Optimism?

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Greenspan: Mixed messages

The Federal Reserve Open Market Committee is loading its monetary gun again this week, having settled in for a two-day sit-down Tuesday that will result — on Wednesday at the usual 2:15 ET unveiling — in another interest-rate cut. The Fed funds rate stands at 4 percent, and it's going lower. That much we know. The question is, how much lower? And, even more important, when the heck are these things going to start working?

The back-story has been the same for a long while. Stock market flat. Corporate earnings depressing. Capital spending by businesses — the collapse of which started this slowdown, and the resurgence of which must occur to finally end it — still in deep hibernation. Alan Greenspan slashing rates with the zeal of a self-preservationist, a half-point at a time, on five straight occasions. (Twice between meetings.)

Economy, still hovering at or about (or below) zero growth, not responding. Unemployment ticking up. Consumers, making up two-thirds of said economy, desperately needing to continue whistling past this graveyard and spend as if they still had a secure job and a solid portfolio. And now the commonly quoted date for turnaround is edging into next spring.

Will that be a half or a quarter, Sir?

So that's where the Fed is at as it contemplates whether to cut rates by another half-point (50 basis points) or whether it's time to ease off on the throttle with a quarter-point cut (25 basis points). Wall Street, its ears ringing with the daily dirges of the tech and manufacturing sectors alike, would very much prefer another 50-basis-point lopping, but the betting seems to be settling on a 25-pointer, for several reasons.

One is the new batch of tea leaves that landed on the FOMC's mahogany table on Tuesday morning.

Durable goods orders — demand for cars, computers, refrigerators and the like — spiked 2.9 percent in May, said the Commerce Department, pleasantly surprising forecasters who expected a small drop. It's a volatile measure (just look at April's precipitous 5.5 percent fall) but it offers some hope for the depressed manufacturing sector as well as a sign that those rate cuts may be helping prop up consumer borrowing on finance-heavy items like cars.

The Commerce Department had more good news: New single-family home sales rose 0.8 percent to an annual rate of 928,000 in May, after falling a revised 4.5 percent to 921,000 units in April. Another slight surprise for forecasters, who'd expected an average hike of 900,000 units, according to a survey by Briefing.com.

And best of all, the mood of the consumer is apparently picking up. Way up. The Conference Board reported that its monthly index of consumer confidence rose to 117.9 in June from May's revised reading of 116.1. Wall Street economists polled by Briefing.com had forecast a reading of only 114.5.

Shoppers, get your credit cards ready

So where does that leave Greenspan? Likely, relieved — especially about consumer confidence, though that measure has been notoriously bad about predicting actual consumer behavior in this Spring of the Slowdown, when the measure has consistently pointed to spending levels far below what stalwart consumers have actually pulled out of their well-worn wallets.

Announced layoffs are still in the process of becoming reality, and a few more ticks in the national unemployment rate could waylay a lot of trips to the mall, the beach, Grandma's house or wherever the dollars get spent. But the fact that confidence is back on the rise as summer begins is the best sign anybody's got that the Great American Shopper has not acquired the exquisite sensitivity to economic conditions and expectations displayed by your average Wall Street trader. And nobody's complaining about that.

So if Greenspan decides to scale back his rate-cutting regime for the time being, there's one excuse. Here's another: inflation. Not now — but down the road, six or nine months from now when rate cuts traditionally do their best stimulatory work.

Greenspan is now six months from year's end, about when Wall Street keeps telling him businesses will get their investing legs back. Too much monetary fuel now, and the flames burn too hot — forcing image-conscious Big Al to have to raise rates back up again when he can be easily accused of throwing cold water on the first flickers of recovery. Remember, he's still sensitive about criticisms that he steepened the economy's fall with that 50-point hike in May 2000.

The other reason to cut 25 points is to display a little optimism. Sure, Wall Street will moan that he's abandoning corporate America (again), but the cooler heads will realize that maybe Greenspan figures that after five straight 50-pointers, things are finally picking up. (See Tuesday's economic numbers.)

There is, however, a very ugly flip side to that, which Greenspan will be sure to mask in the most oblique language he can muster:

He may be out of bullets. After all those double-barreled rate cuts and all that deafening silence from both the markets and the rest of the non-consumer economy, the Fed may have done all it can do, or at least all that it's sensible to do. And a quarter-point might be just the last, best, least panic-inducing way of stalling for time.