By Caren Bohan
WASHINGTON - Federal Reserve Chairman Alan Greenspan is set to testify on the U.S. economy on Thursday with markets in suspense about what kind of spin he will offer on the recent run of upbeat economic data.
Some economists think that when the Fed chief gives part two of his semiannual monetary policy testimony before the Senate Banking Committee at 10 a.m., his tone may differ a bit from Feb. 27, when he delivered the first part to the House of Representatives financial services panel. "I think Greenspan's going to be more optimistic," said Greg Valliere, managing director at Schwab Washington Research. "This economy is not going to have a wimpy recovery. I think it's going to be robust."
If the Fed chairman puts heavy emphasis on the potential for a solid economic recovery, some analysts might interpret that as a signal the central bank may be mulling a reversal of last year's 11 interest rate cuts.
On the other hand, some experts said the Fed may not be in any rush to even consider pushing up borrowing costs with the outlook still uncertain for some key areas of the economy, such as business demand for capital equipment. Typically, Greenspan's delivers identical versions of his formal monetary testimony to both the House and Senate committees, then fields whatever questions lawmakers have. But there have been exceptions to that rule. For example, one year ago, when there was a time lag of 15 days between the Senate and House testimonies, the Fed chief modified a few paragraphs of his presentation the second time around, updating it to reflect the latest economic data. While some analysts said it was possible he could tweak his formal testimony on Thursday, many said he might prefer to reserve any new points for the question-and-answer session. "The opportunity to address (the new economic data) is likely to present itself in the Q&A," said Lyle Gramley, a former Fed governor who is now a consulting economist at the Mortgage Bankers Association.
COULD THE TILT CHANGE?
On Feb. 27, Greenspan told the House Financial Services Committee that a turnaround seemed to be under way in the U.S. economy, which fell into recession in March. But he cautioned the recovery would probably be tepid. The comments were taken by Wall Street as a sign the Fed might be content to leave overnight interest rates at their current 40-year low of 1.75 percent until at least the latter part of this year. Over the past few days, some investors have moved toward the view that rate increases might occur around mid-year, although opinions still vary widely. One way in which the Fed could signal it is at least thinking of a change in policy would be to change its official "tilt" on the economy from a position that weakness is the greatest economic threat to a balanced posture that emphasizes both inflation risks and the risk of economic weakness. Some analysts think the Fed might make this subtle change -- which does not affect interest rates but may affect investors' outlook for borrowing costs -- as early as the next Fed meeting on March 19. Among the data that have come out recently, one of the most impressive reports was issued by the private Institute for Supply Management (ISM). The key Purchasing Managers Index put out by ISM rose to 54.7 in February from 49.9 in January. The rise in the index above the key level of 50 indicated the factory sector had finally emerged from its 18-month slump. Dovetailing with that was a report from the Commerce Department on Wednesday that showed orders for U.S. manufactured goods surged 1.6 percent in January.
"The economy's off and running now," said Paul Kasriel, chief economist at Northern Trust in Chicago. If Greenspan highlights the recent upbeat data on Thursday, he will not be the first Fed official to do so. Earlier on Wednesday, Robert McTeer, president of the Dallas Fed, said the recent economic signs have been "positive" and suggested there might be a push to raise interest rates before inflation revives. "There will be pressure -- if it succeeds or not I don't know, but there will be pressure to start the process of tightening before you actually see inflation show up," he said. Separately, Philadelphia Fed President Anthony Santomero said it was too soon to speak of raising rates but that the Fed could shift its policy stance from one in which the economy is at risk of further weakness to a balanced stance.