WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan is caught in a formidable set of political and financial market pressures that he will have to sort out in public when he testifies at his confirmation hearing before the Senate Banking Committee.
A few grumpy words on the U.S. economy or about the Fed's inability to provide a helping hand with additional rate cuts could send stock and bond market investors running for the hills. The wrong words could also diminish consumer confidence when the Bush administration is seeking to reverse public attitudes about the economy.
Mr. Greenspan's confirmation hearing was originally scheduled for today but was postponed until after the Senate completes work on the bank reform legislation. That will probably mean an appearance before the end of the week, a committee spokesman said.
"He's got a very tricky little testimony to do," said Joseph Liro, senior vice president at S.G. Warburg & Co. "There is the risk that he could say something that could move the stock and the bond market in a significant way if he isn't very careful in how he chooses his words."
Mr. Greenspan has generally received high marks from bond market participants as well as members of Congress for his leadership of the Fed. President Bush has said he is impressed with the way central bankers and other leaders around the globe have praised Mr. Greenspan.
As a result, reappointment to serve another four-year term as chairman of the Federal Reserve Board is not in question, nor is there any doubt he will get another 14-year term as a member of the Federal Open Market Committee.
But financial analysts say the soft-spoken economist from Wall Street has a lot of explaining to do when he testifies, given the latest stream of statistical reports showing that the U.S. economy is barely moving ahead despite the Fed's series of moves to lower interest rates.
Mr. Greenspan's position is complicated by the ongoing nervousness in financial markets in the wake of last week's plunge in the stock market. The Fed chairman's statements are always closely scrutinized by traders and investors, but the present environment is clearly fragile.
The bill approved by the Senate to cap interest rates on bank credit cards may not have been the sole reason for the drop in the stock market, but there is little doubt the legislation highlighted a mistrust in financial markets at the prospect of Congress grabbing the economic policy levers.
"They're trying to mandate the private sector to stimulate the economy when they know fiscal policy is straightjacketed with a $350 billion budget deficit," said Mr. Liro.
Mr. Greenspan has not testified before Congress since July 16, when he presented the Fed's semi-annual Humphrey-Hawkins monetary policy report and said the recovery was under way. Since then, public confidence in the economy has fallen, and Democrats have stepped up their criticism of the White House economic agenda.
Analysts say the Fed chairman will probably try to avoid undermining public confidence any further by suggesting that the economy is saggling, a statement that could simply add to the general malaise President Bush is seeking to counter. On the other hand, Mr. Greenspan has a duty to tell it like it is to Congress -- which created the Fed and must approve his nomination.
The situation is complicated because there are now many views on how the Fed and other policymakers should respond to evidence of renewed economic stagnation.
Norman Robertson, chief economist for Mellon Bank in Pittsburgh, says that while some analysts favor lower rates, others say the Fed has done enough. Likewise, he said, analysts disagree on the advisability of tax cuts to stimulate the economy and on where the economy is headed.
"Whatever he says, he's not going to satisfy people," Mr. Robertson said. "It's a very murky outlook."
Mr. Greenspan can plausibly argue -- as the Bush administration does -- that the economy is technically out of recession given the third-quarter rise of 2.4% in gross national product reported by the Commerce Department. But most of the economic reports now suggest GNP is nearly flat again, and there is no question that U.S. output has been sluggish since Mr. Bush took office. Personal income growth has been dismal.
Moreover, there is a suspicion among some bond market participants that the current Federal Reserve Board under Mr. Greenspan's guidance lacks the financial heavyweights of past boards and is more prone to political lobbying from the White House. The market is still wondering whether the Nov. 6 cut in the discount rate was intended in part to shore up a faltering Treasury market during the quarterly auction.
Robert Brusca, chief economist for Nikko Securities International Inc., says bond market suspicions about the Fed are keeping longterm interest rates higher than they would be otherwise given evidence that inflation is cooling.
"Everybody feels that this is the most politicized Fed that perhaps we have ever had, and that's why we don't have lower interest rates," Mr. Brusca said.