View from City Road: Greenspan sends an unmistakable message

Brian Lara, the West Indian left- hander who batted his way into the cricket record books yesterday, and Alan Greenspan, chairman of the US Federal Reserve, have one thing in common. They know that timing is everything.

In truth it's impossible to tell what inflationary pressures may or may not be building up in the US economy; the Fed seems to have as little idea as anyone else. One thing is certain, however. The Fed's third unexpected move in as many months yesterday to lift short-term interest rates is as strong a message as you can get that it intends to tighten monetary policy for as long as it takes to squeeze all danger of a resurgence in inflation out of the system.

In the long term this can only be positive for US financial markets. It was certainly encouraging to see that after the initial shock, Wall Street rapidly found its feet again, in marked contrast to the near- panic reaction to the previous two increases.

Events left market observers on this side of the Atlantic bewildered. Before lunch, talk of a cut in UK interest rates was in the air after a subdued set of factory gate inflation figures for March and evidence from the CBI of retrenchment on the high street ahead of this month's tax increases. Bonds and shares were marching higher in tandem.

Then came the Fed's signal; the mood in London darkened and the FT-SE 100 turned round by more than 50 points to close 30.1 points down at 3,138.2. The long end of the gilt market chalked up losses of more than pounds 2.50, and the talk turned to the likelihood of a quarter-point rise in UK rates so as to keep pace with the US.

Just why Britain should be forced to play Grandma's Footsteps with the US over interest rates is hard to see. Britain's recovery, after all, lags the US one by a good two years. British markets nevertheless seem to find it as hard as ever to escape US influence. German bonds were affected too, but by much less; they eased back by less than a point.

Traders may be getting their fingers burnt on a regular basis as the Fed's timing continues to surprise. But long-term investors who take the view that Kenneth Clarke and the Bank of England will eventually be able to decouple UK interest rates from those of the US might gratefully be adding to their holdings of gilts and shares with every downward lurch in prices.