Interest rate worries to give shares a rocky ride

SHARES IN London and across the globe face a rocky ride this week amid growing nervousness ahead of the crucial interest rate decision in the US.

Alan Greenspan, the chairman of the Federal Reserve, is expected to raise rates by 0.25 percentage points to 5.25 per cent at Tuesday's meeting of the Federal Open Market Committee. But analysts fear the rise will leave the door open for more tightening and create further uncertainty for the stock markets.

Ian Morris, US economist with HSBC in London, said that recent data on the labour market and wage growth will justify a pre-emptive tightening. But he dismissed fears of a 0.5 percentage point hike, saying there was "no need to panic" as inflation was "incredibly well-behaved".

"The on-going strength in the economy and larger-than expected rises in hourly earnings, second-quarter employment-cost index and unit labour costs should mean the FOMC decides to act pre-emptively again."

Stephen Lewis, chief economist at Monument Derivatives, said hopes of a single 0.25 percentage point rise were "far too sanguine". "The FOMC will probably be reluctant to raise the funds rate target more than 0.25 [percentage points] from fear of setting off an avalanche of foreign capital out of US dollar assets," he said. "But this rate hike is unlikely to be the last in the series when there is such strong evidence of excessive domestic demand."

The Fed has made it clear that it has been closely monitoring economic data. A survey of the last 39 releases of data since their last meeting shows 21 were hawkish, 12 dovish and six neutral.

Fears that interest rates are set to rise have knocked stock markets around the world. The FT SE-100 has fallen more than 7 per cent since its all-time high of 6,620 on 6 July. The Dow Jones is currently 3 per cent below its peak of 11,200 on 12 July this year. Markets in Asia and continental Europe have also suffered.

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