Greenspan keeps interest rate on hold

The US Federal Reserve fulfilled financial market expectations by leaving interest rates on hold last night despite signs that the economy has shrugged off the effects of global economic turmoil and may be on the verge of overheating.


Although no change in the cost of borrowing was expected, a few commentators believed the Fed might begin to reverse last autumn's easing of monetary policy and blow some froth off the US equity market.


With the economy growing at an annual rate of more than 6 per cent, the Dow Jones Industrial average closing above 10,000 for the first time on Monday and the labour market continuing to tighten, there are fears of a pick-up in inflation in the months ahead.


However, the Fed Open Market Committee, led by Alan Greenspan, decided that price pressures did not warrant an increase on the rate of 4.75 per cent. Nevertheless, with the pace of growth showing few signs of weakening, the next move is still expected to be upward, even though the Fed did not indicate any bias towards tightening.


Rates were lowered three times last autumn in response to the perceived threat of an economic slowdown emanating from the global financial crisis whch began in Asia in the summer of 1997.


It was brought especially close to the shores of America by the near-collapse of the US hedge fund Long-Term Capital Management which triggered a credit crunch in financial markets, making it hard for companies to borrow money to finance their expansion plans.


Since then, the Brazilian real has also been devalued, which many economists said would hit US growth via a contraction of exports. But US growth, now entering its ninth year of expansion, has not been curtailed and there is a growing belief that it is only a matter of time before inflationary pressures reassert themselves.