Outlook: US rates

THEY ARE not used to interest rate increases in the US. The Fed raised the cost of borrowing by a quarter point in March 1997. Apart from that, the last sustained series of increases took place throughout 1994, the first of them bursting the bond market bubble of the previous year. No wonder Alan Greenspan is more revered than any other Fed chairman in living memory - after all, five years is a lifetime to most traders in the financial markets.

The fact that it will be such a rare event makes the decision to tighten rates all the weightier for the Fed. Not only do investors truly, madly, deeply want to believe in the new paradigm of high growth, high productivity and low inflation in the US, but Mr Greenspan has also encouraged them to do so with his own musings on the subject. It is only in recent months that he has come out as a cautious believer himself.

But the old problems of macroeconomics appear to be gaining ground. The US trade deficit is at record levels, posing the threat of a sudden fall in the unsustainably strong dollar. Yesterday's figures show clearly that the tight jobs market is causing wage pressures. Earnings jumped, unemployment set a new low, and the smaller than expected rise in the employment total almost certainly reflected the shortage of people to employ rather than a shortage of demand for employees.

The market reaction was sanguine. Perhaps not for much longer, though. Higher US rates are round the corner, and by the summer the global economic landscape could look very different.