"greenspan sticks to script"

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    Greenspan Sticks to Script

    By Aaron Pressman
    Senior Market Columnist
    2/16/2005 12:37 PM EST

    Listening to Federal Reserve Chairman Alan Greenspan on Wednesday deliver his semiannual outlook on the economy wasn't quite as dull as watching the grass grow, but it was close.

    Consistent with recent speeches by other Fed officials and statements released by the central bank's rate-setting Federal Open Market Committee, Greenspan said that overall the U.S. economy has "steadied" and was "expanding at a reasonably good pace, with inflation and inflation expectations well anchored."

    There was no sign that the Fed was about to drop the language it has used to describe coming interest rate hikes as being "at a pace that is likely to be measured." There wasn't even anything like the common sense yet market-moving admission by Atlanta Fed President Jack Guynn last week that eventually, "not too far down the road," the Fed would drop the measured pace phrase.

    For those who have kept predicting a pause would be signaled at the next Fed meeting, in the next speech, at the next congressional appearance, they'll have to extend their prediction once more.

    If anything, at the margin, Greenspan's tone possibly signaled a little more hawkishness -- a little greater disposition to raise rates -- than some market players expected. While many believe the Fed will pause soon, perhaps after another hike or two, Greenspan said that the central bank's fed funds rate, even after six rate hikes, "remains fairly low."

    And while pretty sanguine on inflation, Greenspan warned that higher oil prices and a weaker dollar eventually could push up prices more broadly.

    Stocks barely moved but bonds sold off and the yield on the 10-year Treasury note rose 5 basis points, or hundredths of a percentage point, to 4.15%. That less than the average move of 9 basis points on Greenspan's first day of testimony over the past five years, according to Lehman Brothers.

    That same marginal shift helped the dollar, which rallied earlier this year on speculation that the Fed might accelerate its rate hike campaign. It rose to over 105.5 yen and the euro fell to $1.2971.

    For the big picture, though, there was little new to add. "There was nothing by way of news in this testimony," Economy.com's Haseeb Ahmed, senior economist, wrote on Wednesday.

    Some bearish analysts had expected that Greenspan might try to talk down long-term rates to reduce the stimulus provided by loans linked to those benchmarks. He did no such thing, even going so far as to say the low level of longer-term rates could not be explained.

    "For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum," Greenspan told members of Congress. "Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience."

    The most recently released minutes of the FOMC, from its December meeting, said that some unnamed members of the committee were growing concerned that the period of low rates had sparked "potentially excessive risk-taking in financial markets," such as real estate, initial public offerings and corporate bonds.

    Greenspan didn't reveal himself to be a supporter or dissenter of the coalition of the worried. Perhaps mindful of how his 1996 "irrational exuberance" statement had a brief but only temporary effect on stocks, he took a more moderate position in his testimony.

    "History cautions that people experiencing long periods of relative stability are prone to excess," Greenspan said. "We must thus remain vigilant against complacency."

    The maestro's statements on one of the hot-button political topics of the day -- Social Security reform -- also were muted. He didn't call the current situation a crisis and discussed the retirement insurance program only in the context of the government's entire range of coming fiscal problems.

    In his typical understatement, Greenspan said the Social Security and Medicare programs "threaten to strain the resources of the working-age population in the years ahead," Greenspan said. "Longer-term problems, if not addressed, could begin to affect longer-dated debt issues."

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