Faced with inflationary pressure in a near full-employment economy showing no sign of slowing on its own, Federal Reserve policy-makers are tipped to add another half-percentage point to US interest rates when they meet tomorrow. "The Fed is concerned about the strength of the economy and the tightness of the labour market," said Mr Stan Shipley, an economist with Merrill Lynch.
"We believe the Fed will raise rates by 50 basis points at the May 16th Federal Open Market Committee (FOMC) meeting and another 25 basis points at the June meeting."
Such a move, while aggressive, would come as no surprise. Analysts and stock traders have been anticipating a half-point rise since April 27th, when the government said its employment cost index (covering wages, salaries and benefits) surged 1.4 per cent in the first quarter, the largest quarterly jump since 1989.
There has also been a spate of reports, covering factory orders, new home sales, durable goods orders and unemployment, suggesting that the US economy is growing too rapidly - 5.4 per cent in the first quarter - to prevent a surge in inflation.
The most worrying sign for Federal Reserve chairman Mr Alan Greenspan is the contracting supply of available workers due to the joblessness rate, now at a 30-year low of 3.9 per cent. "Worker shortages persisted in every district and practically every industry and occupation," according to the Federal Reserve's latest "Beige Book" survey of economic conditions.
The study, covering developments in March and most of April, confirmed Mr Greenspan's fear that employers will sooner or later have to raise wages to find and retain workers, and will pass such increases on to consumers.
While US inflation for the moment remains remarkably benign, as indicated by the 0.3 per cent decline in April wholesale prices, the Federal Reserve and Mr Greenspan in particular prefer to act pre-emptively in the face of inflationary pressure. A decision to raise short-term rates usually takes six to nine months to have an impact on the economy.
In the UK, meanwhile, Mr Tony Blair, according to a spokeswoman, is to rule out devaluation of sterling to help manufacturers.
In the aftermath of thousands of job losses in the car industry, with both Rover and Ford announcing cutbacks last week, Mr Blair will tell the Confederation of British Industry in a speech tomorrow that there can be no quick fix.
"The message will be ruling out devaluation," said the spokeswoman for Mr Blair. "While appreciating that the strength of the pound has caused difficulty for some parts of manufacturing, the best thing for the whole economy is prudent planning and a stable economy."
Mr Blair will stress the importance of a low-inflation environment and dismiss any idea of changing the Bank of England's remit to set interest rates or force the pound lower.
