July 16 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said investors may have read too much into his testimony on so-called unconventional monetary policy yesterday when they sent U.S. Treasury 10-year notes into the biggest one- day plunge since 1996. Investors yesterday sold Treasury securities after Greenspan told House finance committee members that situations that would require the Fed to purchase longer-term government debt to stem an onset of deflation or to bolster the economy ``are most unlikely to arise.'' That didn't mean the central bank has ruled out such options, Greenspan told the Senate Banking Committee today. ``I wasn't aware I took anything off the table at any time, but apparently that was the view that was taken'' yesterday when the notes plunged in New York trading, Greenspan said in response to a question today.
The central banker started his two-day, semiannual report to Congress at 10 a.m. Washington time yesterday. By 5:05 p.m. the benchmark 3 5/8 percent note maturing in 2013 had fallen 2-1/16 point. The yield rose 26 basis points to 3.98 percent, the highest since April 24 and the biggest one-day surge since March 1996. A basis point is 0.01 percent. The same note today rose 1/2 point, or $5 per $1,000 face amount, to 97 5/8 at 5:15 p.m. in New York, pushing the yield down 6 basis points to 3.92 percent.
Fed's Policy Strategies
``We have spent a good deal of time examining types of alternatives of monetary policy which we believe could successfully address the problem'' of a broad-based decline in prices, or deflation, Greenspan said today. ``It is quite remote in our view because we don't see the elements of that occurring.'' The pricing power of companies ``will continue to engage our attention until we take it off the table,'' he said. Fed officials have come up with a number of strategies, ``all of which are involved in expanding the balance sheet of the central bank, which essentially means we buy different assets and we do different things, including moving out on the yield curve,'' he said. ``That is an issue we have been concerned about for a number of months.''
Economic Outlook
Should the Fed ever have to use so-called unconventional strategies, it would be well publicized, Greenspan said. ``We will offer our reporting in a manner that makes clear what we're doing,'' he said. ``There will be no focus on being obscure.'' At the moment the economy doesn't need added stimulus, he suggested. ``We are seeing gradual changes that are all consistent'' with a faster expansion, the Fed chairman said. ``Statistic by statistic'' economic data are coming in ``somewhat better than what we expect.'' The central bank reported today that industrial production rose 0.1 percent in June, the second consecutive monthly increase, led by a 0.4 percent rise in manufacturing.
The text of the Fed chairman's testimony to the Senate panel was identical to remarks delivered to the House Financial Services committee yesterday. The Fed ``stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance,'' Greenspan said, a point he made twice in the text. Monetary policy can help speed growth and ward off declining prices ``for a considerable period without ultimately stoking inflationary pressures.''
Set to Grow
Fed policy makers have cut the overnight rate by 5.5 percentage points in 13 steps since January, 2001. The benchmark overnight lending rate is now at a 45-year low of 1 percent. The Fed expects the economy to grow at a 2.5 percent to 2.75 percent inflation-adjusted rate this year and 3.75 percent to 4.75 percent next year, according to the economic forecast Greenspan presented. While there is a ``distinction'' between the forecasts and ``what is occurring'' in the economy, ``the general presumption is that even if a modest part of the tax cut is spent in retail, the gross domestic product will go up,'' Greenspan said. Bill Gross, who runs the world's largest bond fund for Pacific Investment Management Co., said June was probably the ``high-water mark'' of a 3 1/2-year bond rally as interest rates at a 45-year low rekindle global growth and stop inflation from slowing. ``The high tide for bond investors has already taken place,'' Newport Beach, California-based Gross wrote in a monthly comment on Pimco's Web site. The 10-year note's yield touched 3.07 percent June 16, the lowest since 1958.
The consumer price index rose 0.2 percent in June, the Labor Department reported today in Washington. The Fed's forecasts measure growth between the fourth quarters of 2002 and 2003 and reflect the ``central tendency'' of forecasts by the five current governors and 12 district bank presidents. //www.bloomberg.com