Outlook: US interest rates

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THE FINANCIAL markets were unusually uncertain about what to expect from the Fed's interest rate verdict yesterday, not least because there were none of the usual hints dropped by board members. In the end it took the sensible precaution of raising the key interest rate once again.

A lot was riding on the choice - perhaps even the verdict of history on Alan Greenspan - whose term as Fed Chairman formally ends next June. In another three months, the US economic expansion will have become the longest on record. Mr Greenspan has given growth the best possible chance while keeping inflation firmly under control. But now there are growing concerns about its health. Although consumer prices remain well-behaved, materials prices and wage costs have shown signs of pick-up, while even the most extreme new economy optimists accept that the American jobs market is far too tight for comfort.

There's more at stake here than keeping US inflation low. As the OECD's half-yearly forecasts emphasised yesterday, the biggest risk to the outlook for other countries stems from the danger of a US hard landing - just as the extraordinary buoyancy of American growth has helped the world ride out the financial crisis with less impact than there might have been.

That hard landing could happen if it turns out that inflationary pressure has built up unsustainably in either the stockmarket or the balance of payments. A sudden big correction on Wall Street or a collapse in the dollar would derail the low inflation growth in prospect for the rest of the industrialised world too.

In any case, the cost of keeping interest rates too low might be highly damaging, while the harm caused by nudging them a bit too high in an economy still steaming along would be negligible. There is already near-universal agreement that in a year's time rates will be a percentage point higher. If the direction is obvious, the case for a pre-emptive "stitch in time" moves must be stronger still