View From City Road: Fed plays its rate cards with skill

The Fed's timely decision to raise rates by half a percentage point was unavoidable. In the run-up to the meeting of the Federal Open Market Committee, its policy-making arm, the markets were already beginning to grumble that a mere quarter-point rise in rates would not be enough.

It would have prolonged the Chinese water torture that has afflicted the markets ever since February, and possibly led to another rout for the dollar and US bonds. European bond markets would have failed to escape the pain since the case that Europe could safely decouple from the US is fading fast as growth picks up.

That said, the Fed may have wanted to do more. But this would have been difficult to achieve. It might have signalled that the Fed knew more than the markets about incipient inflation pressures, leading to panic selling as fears multiplied that more increases were in the pipeline.

Yesterday's announcement was therefore the best possible outcome. The US central bank said the decision met its goals 'for a time', thus suggesting that more inevitably lies in store, though perhaps not for a few months.

Economic expansion is still running above the 3 per cent level that Alan Greenspan, the Fed chairman, regards as a sustainable trend. Job growth is strong and upward pressure on industrial prices is beginning to broaden.

As for European rates, the Fed decision surely signals that the falling interest rate cycle is coming to an end even if it has not yet reached bottom. The Bundesbank, which meets tomorrow, is expected to delay a fresh cut in the discount rate from 4.5 per cent for a while. Yet analysts are already calling a 4 per cent discount rate the bottom of the cycle. And here of course speculation is focusing on higher base rates in the autumn.