An interesting juggling act

By Stephen Evans BBC North America business correspondent

Alan Greenspan is carefully directing the conduct of the US economy

The trouble is the American economy doesn't know whether it's coming or going.

One moment, figures which show growth is slowing are spewed out; the next moment, signs of inflation emerge.

With each contradictory datum, stock traders swerve one way, then the other. Towards the end of April, market sentiment markedly worsened with bears chasing away what had anyway been very timid bulls (stock market terminology for pessimists and optimists).

So what's a central bank to do?

Should the US central bank, the Federal Reserve, worry more about incipient inflation or about the slow-down in growth?

And how does it avoid the worst of all worlds, the return of the stagflation of the 70s where, contrary to previous economic theory, rising unemployment and inflation prowled together?

In the event, the Federal Reserve didn't really answer the question in the communique it issued with the small interest rate rise this week.

It said, as it's said month-by-interest-raising month, that it would continue to move rates up "at a pace that is likely to be measured", a phrase widely interpreted as signalling more small quarter-percentage-point increases.

Conflicting data

But then it added two conflicting comments, firstly that "pressures on inflation have picked up in recent months and pricing power is more evident" - more risk of inflation, particularly given that the Fed dropped a previous caveat about energy prices not bumping up other prices.

The extent to which [the Fed is] softening the language on growth is not nearly as pronounced as the extent to which they're strengthening their language on inflation Steven Englander, Barclays Capital US Fed raises rates to 3%

But, secondly, that "recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices".

In other words, higher energy prices are pushing up general prices even as they depress spending - the worst of combinations for a central bank edging the tiller one way or the other to avoid gusts of inflation or the rocks of slow growth. If both come together, it's hard to know how to steer.

Unlike for Humpty Dumpty, for whom words meant exactly what he chose them to mean, for Mr Greenspan words mean what the market says they mean.

So what did the markets think the Fed's words on Tuesday meant?

Jason Bonanca, a foreign exchange analyst with Credit Suisse First Boston, said: "This shows that they are still very concerned about price pressures."

Steven Englander, the chief currency strategist for North America at Barclays Capital in New York said: "The extent to which they're softening the language on growth is not nearly as pronounced as the extent to which they're strengthening their language on inflation."

Waiting game

The truth is that nobody can be sure if the fear of inflation should trump concerns about the slow-down.

Economic growth is slowing despite US shoppers spending more

One of the most reliable watchers of the US economy thinks much of the worrying slew of recent economic news was an aberration and growth will resume.

Ram Bhagavatula, the chief economist of the Royal Bank of Scotland in New York, said: "Fortunately, at least for the US economy, the cooling of economic data in March is likely to be temporary.

"Even in that month, new home sales hit a new record for this economic recovery. Surveys of manufacturing activity held up at reasonable levels."

Mr Bhagavatula thinks inflation has worsened but growth not.

He concluded: "This information suggests that the perceived economic weakness in March was more happenstance than the beginning of a weaker trend of economic activity."

He may be right. Economics is not an exact science.