A Cheerful Greenspan
Jude Wanniski
April 21, 2004


You are probably up to your ears in analysis of Alan Greenspan`s remarks today before the Joint Economic Committee, but I did sit through the entire two hours and heard things a bit differently than the several reports that I have heard on MSNBC and Bloomberg. I`ll be quick about it.

While Greenspan said it was inevitable that the funds rate would have to go up in the future to prevent the economy from overheating, he also acknowledged in a question from Senator Paul Sarbanes [D-MD] that the developing economy was a "unique" circumstance in his experience and that he still is learning from it every day. When Sarbanes asked if there would have to be several increases, Greenspan was quick to say no, that there have been many occasions when one move was enough, and even then he said the smallest move could be as little as 25 basis points.

Rep. Paul Ryan [R-WI], reflecting the views of some supply-siders, tried to get Greenspan to say that it would be better to raise the funds rate sooner rather than later, or more painful moves would have to be done at some point. Greenspan indicated that the extraordinary productivity increases that we have seen still seem to be continuing to act as a cushion against inflation and might well continue into the future.

Neither mentioned the slide in the dollar/gold price in the last several weeks. Earlier this morning, it got as low as $390 on Greenspan`s limited comments yesterday on how banks now are positioned for higher rates. Senator Bob Bennett of Utah, who chairs the JEC, did get Greenspan to say he watches "commodity prices" as a sign of incipient inflation, along with another batch of statistics. And the Fed Chairman was cheerful without saying much when responding to Rep. Jennifer Dunn [R-WA], who expressed a hope that the rise in interest rates could be postponed as long as possible.

The bottom line is that Greenspan is as happy as a clam at the moment because he knows that he can use "verbal tightening" to keep the gold price from climbing, while he waits for the continuing expansion to bring gold down further as demand for liquidity expands. There still is a chance here for a "best-case scenario" where the funds rate does not go up this year. If oddball growth numbers show up that push the Fed to a rate hike this summer, the decline in gold would be sharp enough to make it a one-time hike of 25 basis points to 1.25%. This implies a 10-year note yield no higher than 4.5%, if history is any guide. According to data obtained from the St. Louis Fed, the 10-year note yielded 3.92% in July 1961, the last time before this decade the funds were at 1.25%.

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