Nerves strike Wall Street as fears of an eventual rate increase grow

Few traders on Wall Street expected the Federal Reserve Board to increase US interest rates yesterday, but they are starting to bet that it will do so later this year.

As the Fed's Open Markets Committee met in Washington yesterday, analysts on Wall Street were confident that it would not spring a surprise by increasing US interest rates for the first time since March.

Yet Treasury bond and share prices took a tumble yesterday because of the growing fear that it is only a matter of time before the Fed feels compelled to increase the cost of borrowing. Figures on employment and earnings last month, due on Friday, are expected to show that America's jobs market is growing ever tighter.

By late morning yesterday the price of the benchmark Treasury bond had fallen half a point, while the Dow Jones index was 53 points lower at 7,937.89.

Stephen Lewis, chief economist at London Bond Broking, said: "The Fed has to be able to justify a rate increase before it goes ahead, but its recent statements suggest it is watching out more alertly for signs of inflation."

Surveys suggest that the source of inflationary pressure is likely to be shortages of labour, even though there is little hard evidence of wages growing faster. Wage inflation has drifted upwards during the past 18 months, but it remained at only 3.6 per cent by July.

However, economists reckon companies are rewarding employees in ways that do not show up in the conventional earnings figures - through generous stock option schemes, for example.

Certainly, there is little prospect of a let-up in the pace of consumer spending, which has been powering the US economy to growth rates well above the sustainable trend.

A survey of consumer confidence from the Confidence Board yesterday reported a further increase in optimism in August, leaving it close to its all- time high.

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