Outlook: US rate standstill

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The Independent Online
AMERICA'S CONSUMERS have the millennium bug to thank for ensuring that they can enjoy low interest rates for another two months.

This was the only reason for the Federal Reserve's decision to hold back from tightening monetary policy yesterday. Despite evidence of unbroken strength in the US economy, policymakers were reluctant to do anything that could have added to potential confusion caused by the Year 2000 computer problem.

With growth steaming ahead at 5.5 per cent and price pressures beginning to appear, there is almost total unanimity that rates must go up. But the Fed's calendar only allowed it to move interest rates yesterday or in February.

The US authorities believe that the world's most advanced nation has managed to solve the problems relating to the Y2K changeover - hardly surprising since their computer industry created it.

But the Fed knows that it cannot eradicate fear. A rise in interest rates so close to the new millennium would have only added to the uncertainty that already surrounds Y2K. It is almost universally held that rates will be put up in February - and possibly in March and June, too .

A tightening bias was largely unnecessary. A series of speeches by members of the Federal Open Market Committee have it clear that interest rates are set to rise. On top of that, the Fed had been debating how to reform its "bias" system, which has been the subject of some negative comment.

British homebuyers and businesses may not be so lucky. A tight labour market and booming consumer demand add up to an inflationary threat. The Bank of England also took the cautious approach in its December meeting to keep rates on hold but, unlike the Fed, it has the opportunity to raise them next month.

Outlook@independent.co.uk

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