Commentary > HaysWire
Everybody loves Alan
Except for the dollar and some angry congressmen
February 11, 2004: 7:49 PM EST

NEW YORK (CNN/Money) - Alan Greenspan must be pretty darn happy with himself tonight. He gave what one analyst described as the most upbeat Fed forecast for the economy in 20 years, something that could have sent the bond and stock markets into a tailspin for fear of rising rates, and instead both of these markets rallied!

The reason why is obvious. Even though the Fed expects the economy to grow at a 4.5-5 percent rate this year, it expects inflation of just 1-1.25 percent. That's potentially lower than last year's 1.25 percent and less than the Fed was expecting when it met last July. That's why the Fed can be "patient" in raising interest rates.

"Greenspan's remarks... and his 'central tendency' projections are broadly consistent with our own view that there will be no monetary policy tightening until well into 2005," concludes Bill Dudley of Goldman Sachs in his daily report (my emphasis).

Now if Dudley and others who share his view are correct, then why did the Fed remove that key phrase from its last policy statement in January, the one that said no rate hikes "for a considerable period of time"? Maybe the Fed really just wanted to make the markets stop focusing on it so much by removing it.

But let's don't side with the no-rate-hike-camp too quickly. After all, Greenspan also said that the Fed can't keep rates low indefinitely and that its key short-term rate will "eventually" have to rise. Plus, he worried about the Fed's policy becoming "improperly calibrated" relative to the faster growing economy. Seems to me he's saying, we know that we risk keeping rates too low too long and kicking up inflation if we don't raise them at some point.

No wonder that there's another camp that feels its views were also validated by today's testimony -- that's the rate-hikes-are-coming-sooner-than-you-think-so-look-out-camp.

Take Wesbury of Griffin Kubik Stephens & Thompson Inc (who, by the way is far less sanguine on the inflation outlook than the Fed). His view is that "sustained economic growth will boost job growth in the coming months and as a result, we believe the Fed will begin hiking rates by May or June." (Again, my emphasis.)

At times like this, it helps to look at market reactions, so let's turn to the currency market. If the dollar folks were worried about rate hikes, they should have bought dollars and sold euros today because it would have meant narrower interest rate differentials against Europe. Instead the dollar tanked, and reportedly that was at least in part because Greenspan was seen as signaling that rates will be kept low for some time to come.

But there was also a stealth attack on the dollar buried in Greenspan's testimony. He said that "currency depreciation we have experienced to date" should help cut the trade deficit because it will make it harder for foreign countries to sell stuff to the U.S., i.e., imports will fall.

So! One more sign that the U.S. at the weekend G-7 meeting in Boca Raton (remember, Alan Greenspan attended along with Treas. Sec. John Snow) did not buy into Europe's idea that it's time to stop the dollar from falling further because it's hurting Europe's growth. Nay! The weak dollar is a good thing, Mr. G. says.

One other group not so happy with Greenspan's testimony: folks in Congress whose constituents are having trouble finding jobs.

Let's take a quote from one of the most extreme examples, Bernie Sanders, Independent of Vermont, He said of Greenspan's upbeat view, "I never cease being astounded about how your observations about our economy are so far removed from the reality that I see every day in my state, middle class people, and what I see all over the country. It's like we live in two different worlds.

Greenspan did not take this lying down, and I think he sincerely meant it when he said, "we may be governors of the Federal Reserve but we are also citizens of this country."

So maybe he's not as happy tonight as I thought. It's great be Fed chairman and have markets respond well when you speak. But it's probably not so great to be the guy who presides over the economy when so many people are still out of work, when many are not making much money, when jobs are outsourced right and left, and the jump in new jobs you and the rest of the Fed forecast aren't there yet.

Day two tomorrow. We'll see how the Senators respond and if bonds and stocks still love Greenspan.

Kathleen Hays anchors CNN Money Morning and The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she is also a regular contributor to Lou Dobbs Tonight.  Top of page

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