By Evelina M. Tainer, Chief Economist, Econoday
1/26/01

Federal Reserve Chairman Alan Greenspan testified Thursday before the Senate Budget Committee on fiscal policy. Last year, he vehemently opposed tax cut measures in favor of deficit reduction. This year he strongly endorsed them to the astonishment of several senators. Greenspan said his views have changed in light of the rapid approach towards debt reduction. It is now entirely possible that budget surpluses over the next few years could leave the United States with zero debt by the year 2006. According to Greenspan, this rapid debt reduction could very well be as disruptive to financial markets as the rapid build-up of debt had been. He concluded that fiscal restraint was indeed a key priority, but it may be better to push back the zero debt period by a few years so that markets will suffer less disruption.

Market players were upset with Greenspan's statement because it was focused on fiscal policy and did not touch on monetary policy. Well, duh… He addressed exactly what he was supposed to before this committee. Moreover, Fed officials usually have a blackout period in advance of an FOMC meeting when they are not supposed to comment on current economic activity. But he did not disappoint in questions and answers, saying that fourth quarter growth was close enough to zero. He also uttered something about inventory correction. It sounds like Greenspan is a bit worried about the economy. It also seems that he would probably strongly favor a 50 basis point rate cut next week instead of the less aggressive 25 basis point reduction bandied about in the markets.