You’ve heard a lot–perhaps too much–about the new economy versus the old economy.
On Tuesday, investors will be straining to hear whether it will be the new Alan Greenspan or the old Alan Greenspan.
The Federal Reserve chairman is scheduled to deliver the Fed’s semiannual assessment of the U.S. economy to the Senate Banking Committee.
This periodic presentation–which the committee’s chairman, Republican Phil Gramm of Texas, last year proposed eliminating as a waste of the committee’s time–has rarely been more poignant for investors. They want reassurance that Greenspan feels their pain.
But the Fed chief is unlikely to address himself directly to investor worries, except by reiterating that bolstering investor and consumer confidence is a vital ingredient in preventing a recession.
Instead, he will take one of two paths.
“Music to our ears would be good news on inflation,” said Rick Furmanski, chief executive officer of Chicago-based Concord Trust.
With the U.S. economy in an air pocket, according to most traditional measures, and the stock market stalled in neutral, testimony about the inflation outlook may seem off the point.
But to many on Wall Street, inflation-fighting is the Fed’s primary job. If Greenspan fails to assure investors that inflation is in check and is likely to remain subdued, whatever else he has to say about cutting interest rates and taxes could fall flat.
With consumer prices on an upswing in recent months, one camp of Greenspan watchers hopes he will stick to the script about inflation vigilance, at least as the essential premise for any economic prescription he might offer.
Another camp says this is no time for standard, old-Greenspan analysis about inflation risks.
“I’d like to have him say that the economy remains weak but is not in recession and that the Fed will do what it needs to do to increase liquidity,” said Marshall Front, chairman of the Chicago-based investment firm Front Barnett Associates.
“The facts have changed from an economy that we felt was overheating,” he said. “It is a vastly different set of circumstances than we thought even last November we would encounter.”
The new Greenspan surfaced early this month, when the Fed chief obliquely but unmistakably endorsed tax cuts as an appropriate remedy for the current economic downturn.
It was an uncharacteristic venture by a central banker into the murky world of fiscal policy and indicated to many analysts that Greenspan fears a recession will erupt on his watch unless concrete action is taken.
Pushing short-term interest rates lower represents concrete action, to be sure. But a third rate cut this year–widely expected at the next scheduled meeting of Fed policymakers on March 20, if not before–could backfire if investors believe Greenspan has abandoned his role as an inflation-fighter.
Monday’s action: Stocks rose broadly in thin trading Monday, ahead of Greenspan’s testimony.
The Dow Jones industrial average gained 165.32 points, or 1.5 percent, to 10,946.77, on New York Stock Exchange volume of 1.01 billion shares.
Advancing stocks outnumbered losers by nearly a 2-1 ratio among NYSE-listed stocks. All but five of the 30 Dow industrials advanced. The broader Standard & Poor’s 500 index added 15.55 to 1330.31.
The Nasdaq composite index added 18.69, to 2489.66, on Nasdaq trading volume of 1.75 billion shares. Winners topped losers by a 10-9 margin.
Tech shares were held in check in part by a 48 percent slide in data storage equipment maker Emulex, which on Friday said customers were postponing orders. The company said sales and profits for its fiscal third quarter would fall short of Wall Street estimates.
The Russell 2000 index of small-company stocks added 8.30, or 1.7 percent, to 505.35.
Treasury securities closed mostly lower as stocks rallied.
Treasury auction: Interest rates fell at the weekly auction of 3- and 6-month Treasury bills.
The discount rate on 3-month bills was 4.90 percent, down from 4.92 percent last week. The rate on 6-month bills was 4.74 percent, down from 4.75 percent.
The coupon equivalent rates at Monday’s auction were 5.03 percent for 3-month bills and 4.93 percent for 6-month bills.
