Federal Reserve Board Chairman Alan Greenspan
Using the first part of his semi-annual testimony before the House Financial Services Committee as a sort of between-the-meetings preview of the FOMC's August 21 get-together, the Fed chairman did very cautiously indicate that the deterioration of the U.S. economy might be starting to slow down — and might even start to reverse itself by early next year. But he as much as shouted that last meeting's deceleration of the rate-cut regime to 25 basis points (instead of the usual 50) was almost certainly temporary.
Another cut probable
"The period of subpar economic performance... is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated and require further policy response," Greenspan told lawmakers in his prepared remarks.
He even went so far as to say that while "the risks would seem to remain mostly tilted toward weakness in the economy," he saw "no evidence" of inflation. That's the other half of the equation — the green light for the Fed to cut rates into a slowdown without fear of stagflation. And Greenspan even took this Fed boilerplate up a notch, expressing what sounded like frustration that despite the Fed's six rapid-fire cuts in short-term rate targets, "most long-term rates have barely budged." Translation: Come on, bond market — I don't see inflation, so why not trade those 10-year bonds a little cheaper so people can get a deal on their mortgage? This is known as jawboning, and it shows that Greenspan, like the markets, is reaching a point of short-term desperation. (However, it did work — the 10-year note fell rather precipitously Wednesday on Big Green's assurances that the inflation-smothering slowdown would be going on for a while.)
Another quarter-point cut in the now-3.75 percent federal funds rate is officially a sure thing — and kicking the throttle back up to a half-point is a definite possibility.
We know Wall Street knows the language, and we know they were listening — CNBC broadcast both the testimony and the interminable Q&A live for all two-plus hours. It was harder to tell, however, whether investors, deluged all morning with lousy earnings reports, looked at the bright side of Greenspan's comments or the dark: Inventory corrections are still going on, businesses are still blanching at the thought of capital investments, and the next six months are going to be very grim indeed. In any case, stocks slid on frenzied volume all morning — the Dow was off 100 and the NASDAQ 50 by noon. In times like these, when we're still waiting for those first six cuts to show up on the economic radar, bearishness from the Fed is not exactly what we've been looking for.
Having done his bit for the parsers in New York, Greenspan spent the rest of his remarks summarizing for Washington the economic story of the past several years — making sure to mention what difficult ones they were to be in charge of U.S. monetary policy. He took lawmakers through the boom and the bust that followed so closely behind, from the inventory imbalances to the layoffs to the housing market to the high-tech bubble. He even lingered a moment to explain — again — why that last 50-point rate hike in May 2000 was a good idea at the time.
It's not easy being Greenspan
So why did Greenspan speak so loudly? Well, it's a long way to the next Fed meeting, and it's been a while since the last one. The FOMC evidently figured it was time to give a little guidance lest anyone get the wrong idea that the last meeting's change in policy — unaccompanied as it was by any change in the tone of the Fed's statement — was anything but a clumsy compromise with some inflation-fearing regional bank presidents.
But sometimes you get the feeling he just wants to talk. The king of Fed-speak is speaking plainer and plainer these days — rarely has Greenspan's congressional testimony been so transparent as it was Wednesday. Certainly his customary subtlety must seem a less necessary precaution when the markets are immersed in their own problems — particularly this week, as some 1,500 earnings reports compete with Greenspan for prominence on Wall Street's list of designated tea leaves. But there's something almost plaintive in the way the Most Famous Fed Chairman in History keeps recounting his latest bout with U.S. economic meltdown.
The last few years have been "a particular challenge for monetary policy," which is "a difficult activity." The capital-investment bubble of the late 90s was "utterly unsustainable." Rebound predictions, "like all economic forecasts, do not have an enviable record." And yet Greenspan's big picture is still rosy — the recent dropoff in productivity gains and the technological investments that fuel them are "only a pause At some point, inventory liquidation will come to an end, and its termination will spur production and incomes." And finally, "It is notable how well the U.S. economy has withstood the many negative forces weighing on itThe economy is still standing."
This is man who has thrown six interest rate cuts totaling 275 basis points into the gaping maw of this slowdown, and he hasn't heard back from any of them yet. The data rolling in has gone from "unrelentingly bad" to "mixed," yet the Fed still doesn't know when its rate-cutting days are through. And though history seems likely to find that merely avoiding a recession after that global-sized Internet bubble-burst is a pretty impressive feat, Greenspan is still hearing from critics that he may have delayed the recovery by waiting until last January to wade begin cutting rates.
Maybe there's a deeper monetary strategy to this newfound penchant for clarity and explanation. But maybe Alan Greenspan, in the middle of a lonely battle with a vengeful business cycle while Wall Street clamors for miracles, just wants a little sympathy.