NEW YORK (CNN/Money) -
Federal Reserve Chairman Alan Greenspan heads to Capitol Hill Tuesday to give his view of the economy, and Fed watchers say his comments could probably be distilled down to four words: "I told you so."
"Greenspan is not a guy likely to brag much, but he'll indicate the economy is still in good condition, that much of the recent bubbling up in inflation is likely to prove transitory, and that fundamentals of the economy are still quite strong despite some of the recent data," said Lyle Gramley, a former Fed governor who is now consulting economist with Schwab Washington Research.
Less than two months ago, the Fed was being criticized by some economists and bond traders as behind the curve on interest rates, allowing inflation to take a foothold while waiting to raise its key rate at its June meeting.
Since then, a number of weaker economic reports have raised some fears in the markets about the strength of the overall recovery. That belief has sent yields on Treasury debt lower and reduced expectations for how high fed funds rates will end the year.
Greenspan appears before the Senate Banking Committee Tuesday and the House Financial Services Committee Wednesday to give his semi-annual statement on the state of the U.S. economy, and to answer committee members' questions.
Economists and Fed watchers say they expect Greenspan to reiterate the Fed's policy statement that rates can be raised at a measured pace, while reassuring legislators that recent weakness in economic data is not enough to change that course.
"It's more of a victory lap," said Steven Wieting, senior economist at Citigroup. "Literally a month ago people were arguing that prices would not stop going up. Now, data we would have killed for two years ago is seen as the end of the world. But alarmists on both sides of this thing have been shown to be wrong."
"I think, if anything, Greenspan helps realign and center expectations when markets want to go crazy at the extremes," he added.
Market reaction can be strong
The Fed chairman's comments at this semi-annual appearance have often produced wide swings in the markets.
In April when the chairman told the Senate Banking Committee that the risk of deflation was dead, bond yields shot up on anticipation that Fed would again start raising rates sooner than later. But Wieting and others believe that the markets will likely be relatively quiet after his testimony Tuesday.
"He can't sound bullish and he can't sound bearish," said Anthony Chan, managing director and senior economist with J.P. Morgan Fleming Asset Management. "He has walk a very fine line to justify maintaining this measured status quo."
But unlike a speech or a Fed policy statement, Greenspan will face questions Tuesday. With the election looming, Republicans could be pressing Greenspan to proclaim the economic recovery a rousing success, even if those comments would prompt traders to send interest rates higher.
Democrats on the committee could be trying to get the Fed chairman to suggest the economic recovery is not as strong as the Bush administration argues it is. Greenspan, who was recently confirmed for his final term as Fed Chairman, isn't likely to give either side exactly what they want in his answers, according to Fed watchers.
"I don't think he'll let himself be dragged into that kind response to both sides of political fence," said Gramley.
Even weaker-than-forecast June reports on job creation, auto sales and other economic measures aren't enough to make the Fed chairman express concerns about the state of the economy, according to economists.
"He has time over time noted a single month of economic data is a poor guide to the future," said Wieting.
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