Greenspan: Pay Down Debt
Financial markets found few surprises from Alan Greenspan on Wednesday as he repeated his Humphrey-Hawkins testimony to the Senate Banking Committee.
Markets were hoping for further hints about the extent and timing of interest rate hikes, but received little guidance from the Federal Reserve chairman. Markets were little changed.
Markets sold off last Thursday as Greenspan delivered a stern warning on inflation as part of his even-handed outlook on the economy. Greenspan praised the high productivity that's boosted output, profits and living standards while cautioning that the Fed would act "promptly and forcefully" if necessary to quell inflation.
Greenspan began the hearing Wednesday by reading almost exactly the same excerpts from his prepared text that he read to the House Banking Committee last Thursday.
Most of the questions focused on fiscal policy. The Senate will take up a 10-year, $792 billion tax cut later Wednesday.
The senators, led by their leaders, Sen. Phil Gramm, R-Texas, and Sen. Paul Sarbanes, D-Md., each tried to get Greenspan to endorse his views, but Greenspan would only repeat his long-standing view that neither tax cuts nor spending increases are desirable because paying down the national debt is the best use of the projected budget surplus right now.
Greenspan did say he'd much prefer tax cuts to spending the surplus, cheering Republicans. He acknowledged that tax cuts would be stimulative to the economy, giving the Democrats solace that even a free-marketer like Greenspan can't abide the Republicans' plan.
Markets read Greenspan's testimony last week as signaling higher interest rates, perhaps as soon as Aug. 24. The Fed raised its target on the Federal funds overnight rate by a quarter percentage point to 5 percent on June 30.
For Wednesday's hearing, traders were looking particularly for hints that Greenspan and the Fed are seeing signs that the tight labor markets are beginning to push costs higher, which could ultimately fuel a revival of inflation. Greenspan has made it clear that the Fed would act "pre-emptively" if signs emerge.
In his prepared remarks, Greenspan said the Fed does not expect an outbreak of inflation because "mechanisms in place" will slow the economy to a more sustainable pace and because the Fed will raise rates to slow the economy if it doesn't do so on its own.
On Thursday, the Labor Department will release the Employment Cost Index for the second quarter. The ECI is the government's best gauge of wage pressures, which have been remarkably muted so far despite the lowest unemployment rate in a generation.
Written by Rex Nutting, Washington bureau chief for CBS MarketWatch