Fed Chairman Alan Greenspan reports to the Joint Economic Committee of Congress today on the U.S. economic outlook. The session has the potential of setting a positive tone for the financial markets for all of 1994. Greenspan has his first real opportunity since last August's Humphrey-Hawkins hearings in Senate and House banking committees. The sag in the bond market since October 15, we think, has been largely due to speculation that the Fed has again fallen under the influence of the obsolete Phillips Curve inflation/employment trade-off. Our own forecast of a 5.5% long bond in 1994 is predicated on the assumption that Greenspan does not believe true economic growth is inflationary and that he will continue to watch commodity prices, especially gold, as the surest sign of inflationary expectations in the market. We hope Greenspan addresses that question this morning, either in his prepared statement, or in the question period. The clearer he is by signaling his intent through words, the less need there is to do so with an explicit change of the Fed funds rate. That is, he can reassure the nation's creditors without raising short term rates, on our assessment that the gold market has been signaling a surplus of anxiety, rather than a surplus of liquidity. A further decline in gold toward the $350 level would be accompanied by a renewed rally in bonds and further advances in stocks, especially the low-cap NASDAQ. New bullish signs are also evident elsewhere. The political breakthrough in Tokyo indicates the Japanese have finally reached consensus through their intricate and laborious process in accommodating the new government. Reductions in income tax rates can now be achieved this week. The 8% rise in the Nikkei today is welcome news for all of Asia, as well as the rest of the world economy.
We will follow up tomorrow with an assessment of Greenspan's testimony of today, along with other matters we have been following relative to the political outlook in Washington. This report would have come to you Friday, but I was trapped in the ice in travel between Washington and Morristown.