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NEW YORK (CNN/Money) -
Alan Greenspan's words are known for rocking the markets but Fedwatchers say this week's testimony will be more like "don't rock the boat."
"There's nothing to be gained by saying anything right now," predicted Diane Swonk, chief economist at Mesirow Financial in Chicago, because within the Federal Reserve itself, on the policymaking Federal Open Market Committee, "there's a lot of uncertainty... over how long it will have to raise rates."
"There's no reason to tip your hand because they are in a reactive phase," Swonk said, pointing out they are not at a point where they are getting to make a big shift on policy.
The Fed has hiked its key short-term rate eight times since last June, lifting the federal funds rate from a super-low 1 percent to a closer-to-normal 3 percent, all along the way explaining this not as a move to fight inflation or slow down the economy but to normalize interest rates. In theory the Fed is seeking a "neutral" fed funds rate, a rate that neither stimulates nor reins in the economy.
So far nothing has deterred the Fed from this course, neither a soft patch in the economy as occurred around March of this year or bursts of higher inflation readings due to the spike up in energy prices.
The consensus view on Wall Street is that there's nothing in the economy's cards to make them shift now. Recent numbers on consumer spending have been a bit stronger while the labor market has firmed up somewhat, suggesting growth is on track. And the latest readings on the consumer and producer price indexes both came in weaker than expected, a surprisingly reassuring sign that inflation is still under control. Therefore there is no reason to speed up the pace of rate hikes with half-point instead of quarter-point steps, and no reason to pause.
Tony Crescenzi of Miller Tabak says if Greenspan were to signal a pause in the rate-hike campaign, he would risk "the further cannibalization of the Federal Reserve's previous interest rate hikes." This is a reference to the fact that while the Fed has been hiking short-term rates, bond yields have fallen sharply, giving the economy in general and the housing market in particular stimulus which has run counter to what policymakers have been trying to achieve.
"This is because any indication of a pause would certainly cause an economy-stimulating loosening of financial conditions via gains in stock and bond prices," he said.
In a move that caught Wall Street's eye, the Fed posted Greenspan's answers to a series of questions he was asked on the economic outlook at a hearing in early June. Many concluded this was a not-so-subtle attempt by the Fed chief to telegraph his current view of the economy ahead of Wednesday's remarks and avoid market volatility.
Among the key points, Greenspan said that while high oil prices have shaved a few percentage points off the economy's growth rate, so far it is withstanding this headwind well. He once again explained why a flattening yield curve (i.e., a shrinking in the gap between short- and long-term rates) does not signal a slowdown in the economy as it has in the past. And he stated in so many words that it is not the Fed's job to avoid or manage housing bubbles but rather its responsibility is to make sure that the banks lend prudently and are in solid enough financial shape to weather any reverberations that might occur if a bubble pops.
Economists will be watching to see if Greenspan gives any hint the Fed is getting ready to drop a word from its policy statements that obsesses Wall Street: "measured," as in stating it will continue to hike rates at a "measured pace." Some say the Fed probably realizes it needs to get out of the policy box it has locked itself into by repeating that phrase meeting after meeting.
Other than that, economists say, there's no reason for Greenspan to make waves if the Fed's not going to row it's policy boat in a new direction.
"These testimonies are to shape people's expectation of future moves," Swonk said. "If you're not sure where you are going then why change it?"
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-- Kathleen Hays is economics correspondent for CNN and contributes to Lou Dobbs Tonight. You can read more of her columns here.
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