Financial Daily from THE HINDU group of publications
Wednesday, Feb 11, 2004
Financial Daily from THE HINDU group of publications Wednesday, Feb 11, 2004 |
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Money & Banking
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Insight Columns - Financial Scan Greenspanspeak unlikely to change S. Balakrishnan
IT will be Alan Greenspan's day yet again. On Wednesday, the Chairman of the US Federal Reserve will testify to the US Congress on the state of the US economy, monetary policy and interest rates. As usual, what he says (or does not say) will move markets. They can never have enough of him. It is less than two weeks since the Federal Open Markets Committee (FOMC), which sets American interest rates, met and decided to stay put. This was a foregone conclusion, but the Fed dropping the phrase, "considerable period," in describing its soft interest posture, shook the market. The crucial employment report, out last Friday, was below expectations, but nowhere as bad as in the previous month. Payrolls increased 1,12,000, while forecasts were 1,50,000 upwards. Bonds took heart from the data and bounced back somewhat from the previous week's sell-off, with no prospect of an early Fed move. In other times, the growing fiscal deficit would have taken its toll on bonds. There is red ink in Government finances for as far as one can see, but this, surprisingly, has had no effect at all on yields. The "crowding out" theory is, at least as of the moment, in hibernation. In fact, there are strong countervailing forces at work. Japan's massive yen selling in forex markets may have had little impact on the dollar/yen exchange rate but it has certainly made a mark on Treasuries, into which the Japanese have put their intervention dollars to work. US yields would have been significantly higher but for Japan (and China) continuing to pour money into American bonds. What is Greenspan going to say? He seems to have struck the right policy mix of keeping ample liquidity in the economy amidst record low interest rates and maintained it for what would have been (originally) thought to be an unbelievable length of time. All this while, inflation has stayed out of sight. His assessment will be that the economy is chugging along nicely and the jobs picture will show a lot of improvement in 2004. With no price pressures visible anywhere in the horizon, there is no need to tinker with interest rates. All this will, of course, be couched in his inimitable language. The soothing messages of the recent past will not change. A further rally in bonds following Greenspanspeak is very likely. This will push 10-year and 5- year Treasury yields below the psychological levels of 4 per cent and 3 per cent.
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