US ready for pre-emptive strike

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The Independent Online
The likely timing of any rise in United States interest rates will become clearer after this Friday's payrolls report, which is expected to show the US economy is close to full employment.

Concerns that the Federal Reserve might sanction a pre-emptive rate rise to ward off inflation were raised last week, when Chairman Alan Greenspan gave a blunt assessment of the US economy in the first segment of his semi-annual report to Congress.

Last week Mr Greenspan warned for a second time of the dangers of "irrational exuberance" in financial markets. Although he said the "economy's prospects in general are quite favourable," he suggested the Fed may soon raise rates. He continues his testimony on Wednesday.

Friday's figures on non-farm payrolls will be the most closely watched of this week's reports and should show whether Mr Greenspan was right to have alerted investors to the dangers of inflation.

The consensus among economists is for a rise in new non-farm jobs in February of 204,000, down from 271,000 in January. That would take the jobless rate to 5.3 per cent, which is seen as close to the bottom. Average hourly earnings are expected to have jumped by 0.4 per cent on the month after January's figures were depressed by the bad weather, suggesting there is little slack in the labour market and that wage increases could trigger price rises.

Although economic growth is likely to slow in the first quarter to between 2 and 3 per cent from the buoyant 3.9 per cent seen in the final quarter of last year, there is little evidence that the economy is cooling significantly. Orders to factories for big- ticket goods rebounded in January, according to a report published on Thursday.

Manufacturing strength "plays into the camp that the Fed may have to tighten in the not too distant future," said Kevin Flanagan, an economist at Dean Witter Reynolds in New York.

In Europe, all eyes are on Germany's February unemployment figures, due out on Thursday morning. Figures last month showing German joblessness at its highest level since 1933 raised worries that social spending might derail the country's effort to meet the deficit targets for the single currency.

Economists are looking for a small rise of 23,000 in the number unemployed after January's rise of 160,000, which was the largest increase in a single month since the Second World War. Copyright: IOS & Bloomberg.