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Tuesday, October 5, 1999 Published at 21:08 GMT 22:08 UK

Business: The Economy

Fed leaves rates unchanged

The US Federal Reserve: still worried about inflation

The US central bank has provided some relief for markets and companies around the world worried about higher interest rates.

The Fed has decided to keep US interest rates unchanged at 5.25%, signalling its faith that inflation is now under control in the booming US economy.

[ image:  ]
But it said it was adopting a "bias towards tightening," which means it expects the next move in interest rates to be higher.

The decision was widely expected after the two rate rises in June and August.

US stock markets, which have been in the doldrums for most of the summer, had been strengthening for most of the day on the hopes of no change.

But after the announcement, the Dow Jones Industrial Average of leading shares sold off sharply, turning a 100 point gain into a 50 point loss.

Mixed signals on economy

The BBC's Andrew Walker reports
There have been mixed signals on the US economy recently.

Economic growth slowed down even more than expected in the second quarter of the year, but there have been signs that consumers have started spending again over the summer.

While consumer prices remain moderate, there are also signs that the costs to factories of raw materials is set to increase, led by higher oil and gold prices. The dollar is also weakening, raising the price of imported goods.

[ image: Alan Greenspan is credited with managing the longest boom in US history]
Alan Greenspan is credited with managing the longest boom in US history
And although the labour market is extremely tight, with unemployment a record low, there is as yet no sign that wages are starting to increase too fast - a key worry of the Fed.

"Tthe growth of demand has continued to outpace that of supply, as evidenced by a decreasing pool of available workers willing to take jobs," said the Fed in a statement explaining its decision.

"(We) 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," it added.

Unemployment and wage figures out Friday could have a strong influence on the Fed's next decision.

It meets again to set rates on November 16.

UK and European rate decision due

Both the Bank of England and the European Central Bank decide their policy on interest rates this Thursday.

Economists are divided on whether they will raise rates.

The Bank of England, which surprised markets by raising rates last month by 0.25% to 5.25%, says it is worried about accelerating house prices. But the most recent survey, from the Halifax, suggested that prices have now stabilised.

Business and union leaders have urged the Bank's Monetary Policy Committee to refrain from further rises.

More worrying may be the prospect of a rate increase by the European Central Bank.

The recession in Europe seems to be ending, and business and and consumer confidence is rising despite high unemployment. Some ECB policymakers have been calling for pre-emptive action to see off inflation.

Large commercial banks have been buying up euros this week in anticipation of a rate hike.

"Banks bid for large volumes this week as they are expecting a rate hike by the ECB on Thursday. They are trying to get as much money at a relatively cheap rate as possible," said Juan Perez-Campanero, treasury chief economist at Bank Santander in Madrid.

The ECB lowered rates from 3.0% to 2.5% in April.

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