Fed Chairman Alan Greenspan will appear before the Senate Budget Committee tomorrow beginning at 10:00 EST to discuss "evolving fiscal challenges" with the panel. Though the markets will be on alert for possible monetary policy hints ahead of next Wednesday's meeting of the FOMC, the Federal Reserve's policymaking arm, the senators will be digging for his views on President Bush's $1.6 trillion tax cut package -- and the outlook on federal budget surpluses.
While it's unlikely that Greenspan will rise to the bait of endorsing the package, he won't reject it outright. Indeed, he could well repeat his prudent mantra of debt paydown first, tax cuts second and increased spending a distant third. He is also an ally and friend of Bush's Treasury Secretary, Paul O'Neill, who embraced continued fiscal restraint in his confirmation hearing.
Greenspan remains concerned about the drop in consumer and business confidence becoming more vicious, so Bush's tax goals do not conflict with his own of extending the record run of sustainable economic growth.
Another way for the Fed to stay above the tax-cut fray: front-loading rate cuts. S&P expects the FOMC to cut the fed funds rate another 50 basis points next week.
From Standard & Poor's MMS