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Greenspan's Mostly Happy Tune: Booming corporate profits and contained inflation are likely to make him upbeat before Congress. One threat: Election-related terrorism (Rich Miller, 7/19/04, Business Week)

When Federal Reserve Chairman Alan Greenspan troops up to Capitol Hill on July 20-21 to deliver the central bank's semiannual economic report to Congress, his message is expected to be a simple one: relax. [...]

Greenspan's likely bottom line: The economy is doing fine, and the Fed has plenty of time to raise interest rates, which remain near 46-year lows, back to more normal levels.

The monetary maestro bases his otherwise sanguine outlook for both growth and inflation largely on one thing: booming corporate profits. The earnings surge has left Corporate America flush with cash. According to the Fed's data, nonfinancial businesses took in $62.8 billion more in cash flow than they spent on capital investment in the first quarter, on an annualized basis.

Greenspan is convinced that companies are poised to put that money to work in expanding their businesses, which would give the economy a boost. "That's yet another shoe to drop in the expansion," he told the Senate Banking Committee on June 15. "And that's the reason why I think that this particular recovery has some momentum in it." With some corporate tax breaks on investment due to expire at yearend, companies have a particular incentive to boost capital outlays in the coming months.

The Fed chief is also counting on supercharged profits to help keep inflation in check. Commerce Dept. data suggest that profit margins were at their highest level in six years in the first quarter. That means companies have plenty of room to absorb the extra cost of adding workers or buying more equipment without feeling the need to raise prices to compensate.

What's more, the lure of fat profits should draw more competition into the marketplace, making it harder for outfits to raise prices without fear of losing sales to rivals. That should put a cap on inflation.