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Tough crowd on Capitol Hill faces Alan Greenspan

"Until two years ago, he walked on water and everybody listened to him with awe."

Robert Reischauer, president of the Urban Institute

For the first time in a decade, US Federal Reserve Board Chairman Alan Greenspan won't be treated as a conquering hero when he testifies to Congress.

Instead, Greenspan will be defending the timing of the Fed's six increases in its benchmark rate target in the 18 months before the US economy entered recession last March, and of the 11 rate reductions since then. He also may be challenged on his statement last year supporting tax cuts. Republicans seized on that to help win passage of President George W. Bush's US$1.35 trillion, nine-year tax reduction.

"Until two years ago, he walked on water and everybody listened to him with awe," said Robert Reischauer, former head of the Congressional Budget Office and now president of the Urban Institute, a nonpartisan research organization. "Now, the questioning will be tougher."

By the time the central bank changed course and lowered its rate target on overnight loans between banks, at the beginning of last year, economic growth had diminished to a 1.9 percent annual pace in the fourth quarter of 2000, from a peak 8.3 percent in the fourth quarter of 1999. The Fed's cuts weren't enough to prevent the economy from contracting at a 1.3 percent pace in the third quarter of last year.

At no time since Greenspan took office in 1987 has the Fed cut rates so much, with so little effect on long-term interest rates. The overnight rate has fallen from 6.5 percent to 1.75 percent in the last 12 months, while the yield on the benchmark 10-year Treasury note, at 5.03 percent, compares with 5.1 percent 12 months ago.

By contrast, when the Fed pushed down rates between February 1989 and April 1992, the yield on the 10-year Treasury note fell to 7.89 percent from 9.33 percent. Again, between July 1995 and January 1996, 10-year Treasury yields fell to 5.58 percent from 6.18 percent as the Fed lowered its benchmark rate.

"For the past six months, when the Fed eased, the back end [of the yield curve], which is what the economy is judged on, hasn't reacted," said Andy Brenner, head of fixed-income sales and trading at Investec Ernst & Co in New York. "It just tells you that he's lost his touch."

Greenspan was slated to appear before the Senate Budget Committee in the US yesterday.

"Yes, they could have acted more aggressively" to start easing monetary policy, said William Stevens, who manages US$1.7 billion in fixed-income securities for Montgomery Asset Management in San Francisco. "There may be a handful of senators who agree with that."

The Congressional Budget Office estimates the US will run a US$21 billion deficit in the government's fiscal year ending Sept. 30. Democrats pin much of the blame for that on the tax-cut package passed last year with Greenspan's implicit approval.

"Tax reduction appears required," Greenspan told the budget panel a year ago, arguing that projected budget surpluses might be too high, forcing the government to buy stocks.
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