Fed continues softly softly approach

The US Federal Reserve is poised to announce another interest rate rise tonight. The only question is: will it be a quarter or half point increase?

Until now, the Fed has adopted a "softly softly" approach, nudging rates up five times in quarter point steps to 6% in an effort to slow growth and keep the lid on inflation. But with few signs of the economy slowing down to a more sustainable rate, many analysts believe tougher action is now needed.

A half point rise would send a strong signal to financial markets that the Fed will not lose control of the situation.

It would also be the best course of action for the UK. It is a old fallacy that rising US rates necessarily mean dearer borrowing costs in the UK: sometimes they do: sometimes they don't. It depends on the relative cyclical positions of the two economies.

In recent years, the US and UK have moved in tandem, which has meant that rates have also tended to go up and down together. But it is not a straightforward one-to-one relationship. UK rates are currently on hold and will probably remain so if the pound stays strong.

Tonight's US rate rise will only affect the outlook for UK monetary policy in so far as it influences the level of the pound. If the dollar rises against the pound after tonight's rate rise, a UK rate rise will be more likely. If it falls, the opposite in true.

Rates rises and slower growth in the US, the world's biggest economy, are bad news for exporters everywhere, including the UK, since they weaken American demand for foreign goods and services. But the longer the Fed delays the necessary tightening of monetary policy, the greater the danger of a crash landing. It is far better to have a bit less growth now than none at all later.