All eyes on Greenspan

[notiCIas]

All eyes on Greenspan

Fed chairman heads to Capitol Hill this week; investors round the world will take notice.

February 13, 2005: 11:20 AM EST


NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan heads to Capitol Hill this week and investors around the world will be hanging on his every word.

Especially one word -- "measured."

"The key thing would be to see if the concept of 'measured' is removed from the Fed's psyche," Bryan Piskorowski, market analyst at Wachovia Securities, told Reuters, referring to the central bank's pledges in recent months to raise interest rates back from super-low levels at a "measured" pace.

Money managers and government officials will also be awaiting Greenspan's comments about the broader economy and Social Security, if any. Greenspan is due before the Senate Banking Committee Wednesday and the House Committee on Financial Services Thursday.

He is also due back before Congress in March to discuss Social Security, which President Bush has said needs an urgent overhaul of its finances. Democrats and some Republicans have accused the president of fear-mongering.

Whether Greenspan will discuss the president's plans to remake Social Security this week isn't clear.

And although Greenspan is unlikely to comment directly on the Fed's next move on short-term interest rates, any hint that the central bank is thinking of dropping its "measured" stance in the coming months would probably drive stocks lower -- at least initially -- and the dollar higher.

That's because traders and investors might take it to mean the Fed is going to get more aggressive about raising rates, which would tend to slow economic growth -- and corporate profits -- thus hurting stock prices.

But higher rates also tend to make U.S. assets more attractive to investors overseas, and thus could give a further boost to the dollar, which in recent weeks has steadied after a prolonged decline.

"I think the Greenspan speech is the be all and end all" for the dollar's performance next week, Todd Elmer, foreign exchange strategist with Barclays Capital in New York, told Reuters last week.

Currency traders in particular may focus on whether Greenspan expands on recent upbeat comments he made on the prospects of shrinking the U.S. current account deficit, comments which helped accelerate the dollar's recent rally.

The effect of Greenspan's remarks on the Treasury bond market is less predictable.

On the one hand, any hint of a more aggressive Fed would normally reassure bond investors, who are always wary about inflation eroding the value of their investments.

But on the other hand, bonds have rallied so long and so hard that any additional big gains in price -- which would drive long-term yields lower still -- seem improbable. Bond prices and yields move in opposite directions.

"After all the negative news about our trade position, our fiscal problems, our currency, our inflation rate and the Fed's credit-tightening program, long-term rates remain very, very low," Carl Tannenbaum, chief economist at LaSalle Bank, said, Reuters reported.

In written testimony Greenspan is likely to restate the Fed's view of subdued inflation in the 1.5 percent to 2 percent range, moderate economic growth and a stable to lower unemployment rate, economists said.

"The still easy state of financial conditions along with expectations of solid economic growth over the next few quarters probably has the Chairman in a slightly hawkish mood," economists at Lehman Bros. said in a research note last week.

Traders expect most of the market reaction to Greenspan's testimony to come on Wednesday, while the Fed chief will use Thursday to clear up any misconceptions the markets may have deduced from the previous day's comments.

It will be the chairman's first direct address on the U.S. economy since October.