US stocks mixed
Mr Greenspan also told the Senate Banking Committee that while inflation is not an immediate threat, it remains something policymakers must guard against.
His remarks seemed to support the views of many economists that the Fed will likely stick with its policy of raising interest rates at a gradual pace. The dollar firmed against other currencies, gold declined and Treasuries weakened, but stocks stalled as investors tried to discern how far the rate tightening would go.
“The problem for stocks is there’s no end in sight,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “Greenspan still thinks rates are too low, and he has no intention to stop raising rates. And history has shown the Fed doesn’t just stop raising rates on its own. Something happens. We don’t know what it will be, but I know that’s the thing that keeps me up at night.”
The Dow Jones industrial average shed 2.44, or 0.02%, to 10,834.88.
The broader gauges were narrowly mixed. The Standard & Poor’s 500 rose 0.22, or 0.02%, to 1,210.34. The Nasdaq composite index was down 1.78, or 0.09 %, at 2,087.43.
Mr Greenspan said Fed officials have been “confounded” by the bond market’s reaction to its monetary policy. Bonds have rallied as the Fed raised short-term rates, sending the yield on the 10-year Treasury note below 4% last week.
The 10-year note fell today, pushing its yield to 4.16 %. But that is still 42 basis points lower than it was on June 30, when the Fed announced the first rate hike in the current cycle.
Today’s comments underscored the Fed’s belief that long-term rates should rise eventually, but in the absence of inflation, there may be little to drive them higher.
“Mr Greenspan is saying, ‘We’re puzzled over this’,” said Peter Cardillo, chief strategist with S.W. Bach & Co. “But that’s the hint, right there: The fact that he’s talking about long-term interest rates is the hint that they might start acting more aggressively. And there are inflationary pressures out there, there’s no question. The weaker dollar has caused inflationary pressure, and if that continues, obviously, those would continue to build.”
While Mr Greenspan’s remarks pressured the rate-sensitive financial sector, housing stocks soared, with the Dow Jones Home Construction Index climbing 1.74%. After several years of low mortgage rates, the real estate industry is threatening to become the next bubble, underscoring Mr Greenspan’s desire for higher long-term rates.
Further highlighting the issue, the government’s latest report on housing construction showed a 4.7% rise in January, the highest level of activity in 21 years. The increase surprised economists, who had forecast a 3.7% decline.
Advancing issues outnumbered decliners by about 5 to 4 on the New York Stock Exchange.
The Russell 2000 index, which tracks smaller company stocks, was up 3.91, or 0.62%, at 638.85.
