Federal Reserve Chairman Alan Greenspan was set on Tuesday to sketch out his outlook for the U.S. economy as Wall Street braces for possible hints that short-term interest rates will remain low for a while.
The Fed chief is scheduled to testify before the House Financial Services Committee at 10 a.m. EDT in the first part of his semiannual report on the economy. He will return to Capitol Hill on Wednesday to deliver part two of the testimony before the Senate Banking Committee.
Ahead of the testimony, bond prices fell amid traders' fears that Greenspan could strike an optimistic tone about the prospects for a stronger economic recovery.
In a gain fueled by reports of robust banking profits, the Dow Jones industrial average rose 58 points to end at 9,177. The tech-laden Nasdaq added 21 points to 1,755, its highest close since April 22, 2002.
Although Wall Street has been enthusiastic in its hopes for a better economic performance, there is little doubt the economy so far has not responded in the way that economists -- including Greenspan -- had said might accompany the end to the Iraq war.
The U.S. unemployment rate hit a 9-year high of 6.4 percent in June and an array of gauges of the factory sector have indicated that industry is still struggling.
Economists said Greenspan will walk a fine line in his testimony, acknowledging the disappointing data recently but remaining hopeful of better times ahead.
Tax cuts that take effect this month, low interest rates and a weaker dollar that could stimulate export growth are all reasons many private analysts believe growth will pick up as 2004 progresses.
But just how much it will accelerate is the key question and one worry the Fed has is that the very low inflation in the economy could give way to deflation, or a broad drop in prices, if consumer and business demand remains weak.
Because of its worries about the deflation risk, the Fed last month cut the federal funds overnight lending rate to a 45-year low of 1 percent.
But one issue the Fed is wrestling with is the fact that its ability to use short-term rates to stimulate the economy further is limited with borrowing costs already so low.
"With the federal funds rate currently as low as it is ... what the Fed says may now be more economically significant than what it does," said economist Bob Ried of Ried, Thunberg and Co. Inc.
Ried predicted that Greenspan would indicate in his testimony that short-term rates will likely stay low for the "foreseeable future," which Ried said could mean at least through the middle of next year.
Markets will be keen to see if Greenspan addresses the idea of so-called unconventional tools -- measures apart from changes in short-term interest rates that the Fed could use to spur growth. One such step that central bank officials have mentioned before is the possibility of intervening in the bond market to try to push down long-term interest rates.
But most economists believe the Fed is not prepared to resort to such actions right away and might want to give the rate cuts it has already done time to work their way through the economy.
The Fed chief is scheduled to testify before the House Financial Services Committee at 10 a.m. EDT in the first part of his semiannual report on the economy. He will return to Capitol Hill on Wednesday to deliver part two of the testimony before the Senate Banking Committee.
Ahead of the testimony, bond prices fell amid traders' fears that Greenspan could strike an optimistic tone about the prospects for a stronger economic recovery.
In a gain fueled by reports of robust banking profits, the Dow Jones industrial average rose 58 points to end at 9,177. The tech-laden Nasdaq added 21 points to 1,755, its highest close since April 22, 2002.
Although Wall Street has been enthusiastic in its hopes for a better economic performance, there is little doubt the economy so far has not responded in the way that economists -- including Greenspan -- had said might accompany the end to the Iraq war.
The U.S. unemployment rate hit a 9-year high of 6.4 percent in June and an array of gauges of the factory sector have indicated that industry is still struggling.
Economists said Greenspan will walk a fine line in his testimony, acknowledging the disappointing data recently but remaining hopeful of better times ahead.
Tax cuts that take effect this month, low interest rates and a weaker dollar that could stimulate export growth are all reasons many private analysts believe growth will pick up as 2004 progresses.
But just how much it will accelerate is the key question and one worry the Fed has is that the very low inflation in the economy could give way to deflation, or a broad drop in prices, if consumer and business demand remains weak.
Because of its worries about the deflation risk, the Fed last month cut the federal funds overnight lending rate to a 45-year low of 1 percent.
But one issue the Fed is wrestling with is the fact that its ability to use short-term rates to stimulate the economy further is limited with borrowing costs already so low.
"With the federal funds rate currently as low as it is ... what the Fed says may now be more economically significant than what it does," said economist Bob Ried of Ried, Thunberg and Co. Inc.
Ried predicted that Greenspan would indicate in his testimony that short-term rates will likely stay low for the "foreseeable future," which Ried said could mean at least through the middle of next year.
Markets will be keen to see if Greenspan addresses the idea of so-called unconventional tools -- measures apart from changes in short-term interest rates that the Fed could use to spur growth. One such step that central bank officials have mentioned before is the possibility of intervening in the bond market to try to push down long-term interest rates.
But most economists believe the Fed is not prepared to resort to such actions right away and might want to give the rate cuts it has already done time to work their way through the economy.
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