Federal Reserve Alan Greenspan, whose words are difficult to interpret in the best of times, may have come across as too pessimistic about the economy's chances for recovery in a recent speech.
Financial investors originally were sure the Fed chairman was signaling more rate cuts were on the way to help a struggling economy. Now they are not so certain.
"I think the bond market realizes it probably overreacted to Chairman Greenspan's remarks," said Sung Won-sohn, chief economist at Wells Fargo in Minneapolis. "If you look at the speech, it was pretty balanced, citing growing signs of a recovery but also warning of risks going forward."
Investors can place bets on the future direction of the federal funds rate, the key interest rate the Fed controls, through a federal funds futures index traded at the Chicago Board of Trade.
Before Greenspan delivered his speech in San Francisco on Jan. 11, the futures market put the odds of another Fed rate cut at around 25 percent. However, after the speech, those odds shot up to 75 percent. But by the end of this week, they had declined to around 33 percent. Part of the problem may have been that before Greenspan's speech, Wall Street had gotten too optimistic about the economy based on a number of more positive economic indicators in recent weeks.
That meant Greenspan's remarks, in which he talked about continued "significant risks" going forward, caused the market to overreact the other way. The Dow Jones industrial average lost 80 points the day Greenspan spoke.
"The market's assessment of the economy before Greenspan's speech was overly bullish and the market expected Greenspan to confirm that optimism," Sohn said Saturday.
"Chairman Greenspan disappointed by throwing some cold water on that optimism."
Greenspan's earlier drafts of his Jan. 11 speech were more optimistic, raising worries inside the Fed that the comments would be interpreted as removing all possibilities of further rate cuts, according to unnamed Fed sources quoted Saturday in the Washington Post.
Because of this concern, the speech was revised to add more pessimism, but Fed officials now believe the markets over-interpreted the pessimism, the newspaper said, quoting the sources as saying Greenspan was likely to argue at the Jan. 29-30 meeting that rates should be left unchanged.
Richard Yamarone, an economist at Argus Research in New York, said Saturday that Greenspan is doing nothing more than showing his normal caution, indicating that while there are reasons to believe the recession is about to end, there is uncertainty over how strong the recovery will be.
"Greenspan just wanted to send a message that we are not out of the woods yet," Yamarone said. "That way if the Fed does not cut rates at the end of this month, the markets won't over-interpret that decision as signaling that the Fed is definitely through with cutting rates and the next move will be a rate increase.''
Last year, the Fed cut rates 11 times, pushing the funds rate to a four-decade low of 1.75 percent.
Yamarone, who said he believed the recession will be shown to have ended in December, said he is not expecting Fed rate cuts at the January meeting.
But Sohn and other analysts said they believed the Fed will go ahead and cut rates a 12th time, as an insurance policy if nothing else. Sohn said that probably will be the Fed's last rate reduction.
By contrast, Michael Evans, chief economist for American Economics Group in Washington, said Saturday he believed the central bank will keep cutting rates as long as the unemployment rate, now at a six-year high of 5.8 percent, continues to rise.
Evans said the economy, as measured by the gross domestic product, probably will turn positive in the first three months of this year, but the recovery will be so weak that unemployment will keep rising until late summer. Many analysts believe the jobless rate will approach 7 percent, still below the 7.8 percent hit as a result of the last recession, in 1990-1991.
"The single most important economic indicator politically is the unemployment rate. Politicians of both parties and Greenspan know this," Evans said.
Greenspan will get a chance to end some of the confusion over his Jan. 11 speech when he appears Thursday before the Senate Budget Committee to tell Congress his views on the economy.
BACK IN THE NEIGHBORHOOD: The planned transit by the ‘Baden-Wuerttemberg’ and the ‘Frankfurt am Main’ would be the German Navy’s first passage since 2002 Two German warships are set to pass through the Taiwan Strait in the middle of this month, becoming the first German naval vessels to do so in 22 years, Der Spiegel reported on Saturday. Reuters last month reported that the warships, the frigate Baden-Wuerttemberg and the replenishment ship Frankfurt am Main, were awaiting orders from Berlin to sail the Strait, prompting a rebuke to Germany from Beijing. Der Spiegel cited unspecified sources as saying Beijing would not be formally notified of the German ships’ passage to emphasize that Berlin views the trip as normal. The German Federal Ministry of Defense declined to comment. While
‘UPHOLDING PEACE’: Taiwan’s foreign minister thanked the US Congress for using a ‘creative and effective way’ to deter Chinese military aggression toward the nation The US House of Representatives on Monday passed the Taiwan Conflict Deterrence Act, aimed at deterring Chinese aggression toward Taiwan by threatening to publish information about Chinese Communist Party (CCP) officials’ “illicit” financial assets if Beijing were to attack. The act would also “restrict financial services for certain immediate family of such officials,” the text of the legislation says. The bill was introduced in January last year by US representatives French Hill and Brad Sherman. After remarks from several members, it passed unanimously. “If China chooses to attack the free people of Taiwan, [the bill] requires the Treasury secretary to publish the illicit
A senior US military official yesterday warned his Chinese counterpart against Beijing’s “dangerous” moves in the South China Sea during the first talks of their kind between the commanders. Washington and Beijing remain at odds on issues from trade to the status of Taiwan and China’s increasingly assertive approach in disputed maritime regions, but they have sought to re-establish regular military-to-military talks in a bid to prevent flashpoint disputes from spinning out of control. Samuel Paparo, commander of the US Indo-Pacific Command, and Wu Yanan (吳亞男), head of the People’s Liberation Army (PLA) Southern Theater Command, talked via videoconference. Paparo “underscored the importance
The US House of Representatives yesterday unanimously passed the Taiwan Conflict Deterrence Act, which aims to disincentivize Chinese aggression toward Taiwan by cutting Chinese leaders and their family members off from the US financial system if Beijing acts against Taiwan. The bipartisan bill, which would also publish the assets of top Chinese leaders, was cosponsored by Republican US Representative French Hill, Democratic US Representative Brad Sherman and seven others. If the US president determines that a threat against Taiwan exists, the bill would require the US Department of the Treasury to report to Congress on funds held by certain members of the
RSS