Millennium bug jitters prompt US to hold rates

THE US Federal Reserve kept interest rates unchanged yesterday, but fears of rate rises early next year were not eased. The federal funds rate stayed at 5.5 per cent and the less-used discount rate at 5 per cent.

The decision was no surprise, although the central bank had been expected by some to shift its bias from neutral to one in favour of fiscal tightening. Most analysts had thought the Fed would do nothing to puncture the consumer buoyancy that has led to a 6 per cent rise in retail sales in the run- up to Christmas. There was also the Y2K computer bug factor: policymakers were reluctant to do anything to add instability.

"Even if the Fed is inclined to raise rates again in the near term," said the weekly Standard & Poor's commentary, "it just does not make sense for the Fed to be rash given the uncertainty surrounding Y2K here and abroad."

The Federal Reserve chairman, Alan Greenspan, has expressed confidence that the banking system will survive the turn of the year with little or no computer malfunctions, but the Fed has taken precautions to ensure there is plenty of cash to reassure consumers.

The Fed raised interest rates by a quarter point last month - the third increase of the year - but switched its bias from pro-tightening back to neutral. However, with unemployment of 4.1 per cent staying near a 30-year low and output growing by 5.5 per cent in the third quarter, Fed officials have again expressed fears of higher inflation.

The combination of low unemployment and low inflation is widely seen as a near-miraculous mix that cannot be sustained. There is concern that the tight labour market may cause wages and prices to start to rise rapidly in the New Year.

The next meeting of the Fed's policy-making open markets committee is at the start of February. Bankers are predicting as many as three further interest-rate rises next year.

Another factor in forecasting for next year is the question of whether Mr Greenspan will hold his position at the Fed. President Bill Clinton is being urged by politicians of both parties, and by several presidential candidates, to announce that he is reappointing Mr Greenspan - acknowledged as a highly successful Fed chairman - well before his four-year term expires in June.

Mr Greenspan has not said whether he would agree to another term. But - as the Washington Post reported yesterday - "he has given no hint that he is ready to leave the Fed" either; a non-signal interpreted by the Post as implying that he would consent to stay on.