Will Greenspan Turn Up the Sunshine?

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Are the rate cuts working yet? Greenspan

Back when Alan Greenspan was Lord of the Boom, parsing his semi-annual testimony on matters economic in front of the House and Senate was usually a pointless exercise. The financial world was like a stockbroker on a cocaine jag — euphoric and volatile and throwing cash around like, well, a stockbroker on a cocaine jag. Greenspan saved his lever-pulling for Fed meetings and put the lawmakers to sleep with boilerplate. The only real payoff to watching was to see how barely Lord Alan disguised his bemusement at the questions posed after his prepared remarks.

How times have changed. Six interest-rate cuts totaling 275 basis points have gone into stirring the markets, the economy or both from their excess-induced torpor, and six months after the regime began neither are any better off. Not that we should necessarily blame Greenspan for failing to surgically remove the "cycle" from business cycle without touching the "business" — considering how hard we partied, this hangover really isn't so bad. But as hindsight-aided criticism mounts that Greenspan not only let the fire burn too hot during the boom but threw too much water on it when he decided to cool it off in May 2000, it's understandable if the Lord is feeling a little added pressure not to wind up his tenure looking like King Lear.

And so these days, with a very long month to go before the next Fed meeting, Greenspan is taking every chance to meddle he can get.

Considerably distilled, last Wednesday's testimony before the House Committee on Financial Services consisted of three main nuggets meant to move the markets — three messages he may or may not tinker with when he does it all over again for the Senate Banking Committee on Tuesday:

1. Things are still lousy:"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. This was classic Fed lingo for "another rate cut in August." (This was also aimed at convincing inflation-fearing bond markets to bid down 10-year Treasury notes on the supposition that with the value of money expected to stay relatively strong down the road, a profit can still be turned with lower interest rates.)

2. Inflation is still far, far away: "There has been little, if any, acceleration in the index of core personal consumption expenditure prices, which we consider to be a more reliable measure of inflation" (than the risen CPI number released just that morning). More bond-market jawboning — those long-term rates, over which Greenspan has only psychological control, are the ones that determine mortgage rates and refinancing opportunities and thus have untold stimulatory power for consumers. (You may also recall that the great economic windfall of federal budget deficit reduction during the Clinton years was a reduction in long-term interest rates.) This also meant, "another rate cut in August."

3. The end is in sight: Go over the transcript, and you find that the Optimism of Alan Greenspan got considerably less reaction — both pundit- and market- — than perhaps its weight in the text deserved.

"The rate of deterioration is slowing, very clearly… something of a positive nature seems to be developing…there is considerable evidence to suggest we are approaching a stability." And not least, the defensive "As a consequence of the policy actions of the FOMC, some of the stringent financial conditions evident late last year have been eased…most anticipate at least a slight strengthening of real activity later this year." And of course the long-term prospects are as rosy as ever — the last words of his prepared remarks were "solid economic growth over time that benefits us all."

In the week since Greenspan was in the House, the stock markets have been beaten to a pulp by a mixed-signals flood of corporate earnings that have left investors professing complete ignorance as when, exactly, things will pick up again. Long-term rates, however, took a dutiful dive after the Fed head's remarks and have mostly stayed there amid the stream of bad news from the equities side. Will he tinker with the message this time around? The overall sense he gave the House — things are pretty bad now, and may get worse, but are probably getting better — is expected to remain the same in front of the Senate's.

But these are tense times. Greenspan knows the more he cuts rates, the more he risks setting an inflationary time bomb that could go off six months from now — and the bigger risk he runs of getting into the same losing time-the-cycle game he lost in May 2000. What he really needs now is not to have to cut very much more, and modulating his testimony in mid-stream could be one way to do it — to maybe cut a quarter-point in August and be done with it.

So considering that Optimistic Alan wasn't quite heard last week — or, just as likely, wasn't quite believed, given the dearth of supporting evidence — take a flyer on him ramping up the sunshine just a little to reduce expectations on the August meet, if only in the Q&A afterward. He knows he can't ease forever, and he's got to start getting people ready for the inevitable day when he's got to let the recovery happen, or not happen, on its own.

And for a Fed chairman who needs to get a message out to the markets his way, in just the right proportions, a roomful of uncomprehending politicians is a good a place as any.