By aggressively cutting rates, Greenspan is betting that the New Economy is alive and kicking and can insulate the U.S. against any inflation outbreak. As long as companies don't overreact to the current earnings squeeze and indiscriminately slash investment, Greenspan believes the long-term outlook for the growth of productivity and profits is bright. Stock market analysts seem to agree. Yes, they've drastically cut their short-term earnings forecasts as the economy has slowed sharply. But they remain surprisingly sanguine about the longer-term outlook.
Foreign investors appear to be on board as well.
Domestic bond investors, who have been dumping Treasuries. The investors are worried the Fed has become so obsessed with boosting corporate profits that it's ignoring a host of inflation warning signs, from sagging productivity growth to a renewed rise in gasoline prices. Greenspan is scheduled to speak to the Bond Market Assn.'s annual meeting on Apr. 27 and could use that opportunity to try to allay investor concerns. One of Greenspan's colleagues, Dallas Fed President Robert McTeer, has all but admitted that bond investors are right to feel a bit slighted. In a speech on Apr. 20, McTeer acknowledged that inflation could end up being a problem for the central bank, but he argued that, for now, it has to take a rear seat in the drive to get the economy moving again.