Is the United States about to help its economy and the rest of the world by cutting interest rates for the first time in nearly three years?
Financial markets will be hanging on every word from Federal Reserve chairman Alan Greenspan on Wednesday for even the tiniest hint about just that - and they're hedging their bets.This is not new - every time Greenspan speaks the market cares - but dealers are paying extra attention given the proximity of a Federal Reserve interest rate policy meeting next Tuesday.
Investors in nearly every market around the globe are concerned. They are looking for economic leadership from the United States at a time when volatility in both emerging and mainstream markets has been extreme.
But Giles Keating, chief economist at Credit Suisse First Boston in London, said markets should not be too disappointed if Greenspan fails to deliver the interest rate soundbite that some may be looking for.
"If they're disappointed tonight, that doesn't rule out a move next week," he said. "One shouldn't expect Greenspan to hint at an easing every time he opens his mouth - that's not his style."
Greenspan was speaking to the Senate Budget Committee at noon MDT (1800 GMT), after Europe has largely shut but while U.S. markets are in full swing.
Stephen Hannah, chief economist at IBJ International in London, also said he did not expect anything too explicit from the Fed chief. But the global ramifications of his comments are paramount in everyone's mind.
"There's no doubt that without rate cuts by the end of the year we'd have a very serious problem in terms of market sentiment, particularly outside of American borders," Hannah said.
Markets currently believe rates will be cut this year, but futures do not fully reflect a cut immediately after next Tuesday's meeting of the Federal Open Market Committee.
The key federal funds target rate is 5.5 percent, and interest rate futures are pricing in a cut of about a quarter point by December.
Interest rate sentiment has been moved back and forth sharply in recent weeks amid conflicting signals from Greenspan and top-ranking U.S. officials.
Analysts said the assumption is that Greenspan will reinforce his latest comments, which suggested to analysts the Fed would take care to ensure U.S. growth remained on track.
"I'm not sure he'd want to pre-empt the meeting itself. I think they'd want to maintain the rule of leaving these decisions until they meet," Hannah said.
Greenspan's colleague, William McDonough of the New York Federal Reserve, on Tuesday said he would go into the meeting very aware of potential weaknesses in the U.S. economy and that anecdotal evidence was pointing southward.
But the New York Fed president said this did not indicate how he or the FOMC as a whole would vote on Sept. 29.
McDonough's comments, made during a press conference in London, were watched by the markets, but interest rate futures were little moved and the dollar eased only slightly.
Greenspan, like McDonough, is one of 12 voting members of the committee. Markets tend to feel he almost has the most sway.
"The focus remains on Greenspan," said Jeffrey Woodruff, foreign exchange strategist at Bank of Boston in London.
Keating of CSFB said the problem for markets in coping with the current situation is that they feel they need to move money a lot faster than central bankers feel they need to take actions.
"The bigger concern here is a gap in perception between the central bankers, who perceive risk but see it as a slower-moving affair, and (the urgent needs of) many financial market practitioners," he said.
In other words, jittery investors hate the idea of waiting. They'll have to wait to get the next piece in the puzzle.