The US Federal Reserve's policy-setting committee shifted its bias yesterday to suggest its next interest rate move would be upwards. However, it decided against an immediate change in interest rates, saying the strengthening productivity growth that had dampened inflationary pressures had apparently been sustained.
In a statement, the Federal Open Market Committee said its members particularly wished to emphasise that the shift to a tightening bias "did not signify a commitment to near-term action".
It left its key federal funds rate - the interest rate on overnight lending between banks - unchanged at 5.25 per cent and held its largely symbolic discount rate at 4.75 per cent. The threat of higher rates led to a sell off of both the US government bond and equity markets last night, but the Dow Jonex index on Wall Street later recovered to end down less than a point on 10,400.59.
The statement said that although productivity trends were favourable, "growth of demand has continued to outpace that of supply, as evidenced by a decreasing pool of available workers willing to take jobs".
"In these circumstances, the Federal Open Market Committee will need to be especially alert in the months ahead to the potential for costs to increase significantly in excess of productivity in a manner that could contribute to inflation pressures and undermine the impressive performance of the economy."
Though this explained its bias towards a tighter future policy, it said it would still need to "evaluate additional information on the balance of aggregate supply and demand and conditions in financial markets" before deciding future interest rate moves.
The committee raised interest rates by a quarter point at each of its previous two meetings in June and August, but maintained its "neutral bias" in both cases.
A large majority of private sector analysts had not expected the Fed to change interest rates, but they were more evenly divided on whether the central bank would make the shift to a tightening bias.
Some economists said that, despite the indications of a tightening economy, the Fed had reason to be cautious because of factors associated with the impact of the millennium date change on computers. This could lead to a protective build-up in inventories by manufacturers and consumers that could distort the figures, and be unwound early next year.
However, some were still expecting the Fed to claw back by the end of the year every one of the three-quarter-point interest rate cuts last year at the height of the Asian financial crisis.
Yesterday's decision came despite persistent signs that the US economy, which grew at a rate of 1.6 per cent in the second quarter, has yet to begin to slow in any significant way.
Data released last week showed that consumer spending, responsible for two-thirds of US economic momentum, gained 0.9 per cent in August. Most worrisome for inflation-watchers was a report from the National Association of Purchasing Management, which said its overall index of economic activity gained 3.6 points in September. The next scheduled open market committee is November 16th, when policy-makers are widely predicted to take no action ahead of the century change and potential Y2K computer breakdowns.
