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To: Alex who wrote (34063)	5/17/1999 11:21:00 PM
From: Ron Everest	Read Replies (1) \| Respond to of 116791

World markets fall due to fear of US interest rate tightening bias. Tommorow's meeting is key: ft.com (Free log in process) World markets fall on Fed policy fears By Gerard Baker in Washington World financial markets tumbled again yesterday as investors' anxiety intensified that the US Federal Reserve would today signal a move towards higher interest rates. Fears of a shift in US central bank policy have risen in the past week, following the first strong indications of rising inflationary pressures. A Fed tilt toward tighter monetary policy at today's open market committee could foreshadow a long-awaited turn toward higher interest rates in the rest of the world. It could raise concerns about whether the US can continue to act as the engine of demand for the global economy. Few expect the Fed to increase its key target federal funds rate from its current 4.75 per cent, where it has remained since the central bank cut rates last year in response to international financial turmoil. The uncertainty is whether the Fed will signal concern about rising inflationary pressures by announcing a change in its policy "bias" from neutral to one in favour of tightening. Yesterday, US and European stocks followed up Friday's sharp drops with further declines. The Dow Jones Industrial Average closed down 59.85 at 10,853.47. Bond prices recovered somewhat from their sharp sell off on Friday, with the 30-year Treasury at 5.902 per cent. At each Federal Open Market Committee meeting policymakers led by Alan Greenspan, Fed chairman, agree to a directive which indicates whether they think the next move in rates will be up or down. The "bias" reflects the balance of opinion on the 12 voting member committee about the future direction of monetary policy. At the end of last year the members decided to make public immediately changes in the policy stance when they think them important for the markets. Since the last rate cut in November the bias has been neutral, meaning policymakers were leaning neither towards raising nor cutting rates. But since then the economy has continued to grow at an annual pace of more than 4.5 per cent, and unemployment has declined to a 30-year low. Last Friday, after months of no evidence of rising inflation, figures showed the largest leap in nine years in the consumer price index for April. Prices rose by 2.2 per cent in the year to April and that rate is likely to rise further in the next year. "The Fed will shift today to a tightening bias in response to diminishing world financial instability and the increasing risk of broader US inflationary pressures down the road," said Allen Sinai, chief economist at Primark Decision Economics, a consultancy in New York. But the Fed's decision today looks finely balanced and many economists believe policymakers will avoid a move towards higher interest rates because most inflation indicators suggest inflation remains dormant. "Greenspan's approach is: Don't do anything unless you have to," said Jim Paulsen, chief economist at Wells Capital Management in Minneapolis. Other evidence suggests the consumer price index was an isolated case of inflationary pressure. In the first three months of the year, the employment cost index, a broad measure of wage and salary inflation, rose at its slowest rate in 17 years.