To make a similar comparison, when the Fed's monetary policy stance shifted to neutral from an easing mode, that would be stage one. Yet it was clear from Greenspan's remarks that he's not quite prepared to go to stage two -- and tighten interest rates.
Greenspan began his testimony by reviewing the second paragraph of the policy statement from the Mar. 19 meeting of the Fed's rate-setting arm, the Federal Open Market Committee. Thanks to the inventory swing, he repeated, the economy is expanding at a "significant pace." But, he added, "the degree of strengthening in final demand over the coming quarters, an essential element in sustained economic expansion, is still uncertain."
ITS OWN SWEET TIME. The Fed chief claimed that little had changed since March -- and renewed the doubts about final demand when he concluded his prepared remarks by suggesting in carefully crafted terms that the Fed is not in a rush to alter the policy bias any time soon.
The key paragraph in this regard -- the one that the markets seized on -- read thus: "To be sure, over time, the current accommodative stance of monetary policy is not likely to be consistent with maintaining price stability. But prospects for low inflation and inflation expectations in the period ahead mean that the Federal Reserve should have ample opportunity to adjust policy to keep inflation pressures contained once sustained, solid, economic expansion is in view." Translation: Greenspan & Co. will raise rates, but it will take its sweet time.
While Greenspan remained upbeat overall, noting that "prospects have brightened," the majority of his testimony was strewn with caveats about potential impediments to accelerating growth. He mentioned the negative wealth effect, in which declining asset values, particularly in financial markets, lead consumers to feel poorer and therefore spend less. That effect is "not, as yet, fully played out," he said.
WAIT AND WATCH. Other potential roadblocks include rising mortgage rates, higher oil prices "sapping the purchasing power of households," declining optimism among business leaders, and a consumer who's close to being tapped out.
The Fed chairman did point out a number of positive factors that could provide fuel for the economy. He noted that layoffs have "diminished noticeably in 2002" and cited well-controlled inflation, a stimulative policy mix, inventory rebuilding, a strong and sustainable housing sector, improved productivity growth of 5.5% in the fourth quarter, and recovering high-tech spending (on semiconductors and computers).
In spite of these bullish economic factors, Greenspan continued to strike a cautionary tone. He said the issue of whether the U.S. can count on a significant increase in production, profits, and capital investment "will be resolved in the next two to four months."
POLICY PROCRASTINATION. U.S. markets diverged in their reaction to his words. Stocks sank into the red as market players took the Fed chief's wariness to mean "slow growth ahead." Shorter-dated Treasury issues strengthened on the signals of policy procrastination. But prices of issues with longer maturities faltered, and yields moved higher -- a classic bet by traders that perhaps inflation may not be as tame as Greenspan expects.
His focus on higher oil prices being a tax on consumption may have also been taken by the bond market to suggest that the Fed was more worried about its growth mandate than inflation.
Trading in fed funds futures -- a vehicle for market pros to bet on future moves in interest rates -- reflected Wall Street's belief that the Fed has adopted a more cautious stance. A May rate hike was all but eliminated from the market, and odds of an increase in late June dropped from 85% to 60%.
Meanwhile, the U.S. dollar, as represented by the trade-weighted dollar index, didn't budge from around its 2002 lows. In the market's view, Greenspan made it clear that Fed policy will remain in neutral until further notice. Wallace is chief market strategist for Standard & Poor's/MMS International