Indeed, Wall Street will be looking for clues relating to a turnaround in the course of monetary policy, and in particular, when the Federal Reserve might change its bias and ultimately pull the tightening trigger. S&P MMS and most other Fed watchers look for Greenspan to remain optimistic yet cautious in his assessment of the economy. The bond market will certainly key its next move off the relative level of optimistism or caution Greenspan shows.
If he continues with his more upbeat assessment of economic prospects, as S&P expects, it should encourage a boost in yields and may soothe stocks. As for the Enron scandal, the Fed chief has already said it poses no systemic risk and that the response actually proves the health of U.S. institutions. Lacking any specific, fresh policy cues from the chairman, attention will turn to his words about the Fed's expectations on growth, unemployment, and inflation.
SPECIAL MENTIONS. We at S&P expect Greenspan to discuss the economy's resilient sectors but also to take note of the risks to future economic growth. The Fed chief will likely pay special attention to consumer spending, given the continued strength in this sector despite the weak labor market. He'll also probably emphasize the impressive strength in productivity during the downturn, reiterating his view that an upward structural shift in long-term productivity growth has occurred. The housing sector's health will also likely be discussed. Strength in these areas will probably be contrasted with the still difficult, although improving, business environment.
Finally, note that the chairman's views on budget and fiscal policy will likely be sought during the Q&A session following the testimony, as members of Congress attempt to gain Greenspan's approval for their respective party's policy agenda.
Overall, he has the delicate task of explaining why the Fed terminated the easing cycle, while avoiding any potentially excessive optimism. However, he has strayed from expectations before, and another surprise could prompt sizable price moves in the bond market. Brecht is a senior economist for Standard & Poor's/MMS International