Financial markets expect the US Federal Reserve to increase interest rates at its meeting later today. The rise would be the first since the US central bank began cutting rates to limit the impact of the Asian crisis last year.
A quarter point rise is expected but some believe a bigger rise is possible. If the Fed does surprise and delivers more than is expected it could lead to a sell-off in world markets on the last day of Telecom Eireann applications.
Recently, the Fed shifted towards a bias to increase rates. A few months ago, the Fed's chairman, Mr Alan Greenspan, talked of inflationary dangers as well as the global recovery from last year's markets crisis.
And, indeed, the US economy has been growing quickly. Growth in the first quarter was 4.3 per cent on an annualised basis.
Inflation remains a fear but shows no signs of picking up - it was only 0.7 per cent at the end of April.
Mr Jim Power, chief economist at Bank of Ireland, says the Fed fears the price component of the National Association of Purchasing Mangers is rising too steeply.
Average earnings are also growing strongly and consumer prices are increasing slightly, he says.
Mr Greenspan has also been preparing the markets for a rate rise. In the past six weeks he has talked about labour market tightness and how the rise in the equity market has pushed economic growth well above its potential.
Most market watchers expect the Fed to begin to reverse the rate cuts it made in September, October and November last year when rates fell from 5.5 per cent to 4.75 per cent on November 17th. Most now agree that the Fed will retrieve at least two - probably all three - of these over the coming months. The outstanding fear is that it may choose to go for a larger amount today.
Mr Power says there is a 30 per cent probability of a half point rise but it would certainly affect equity markets worldwide. Mr Pat O'Sullivan, economist at AIB, also says a larger than a quarter point cut is most unlikely.
The comments following the meeting would be critical, he said. "We are expecting smooth comments, saying the rise is pre-emptive and just balancing last year cuts and thus eliminates the need for larger hikes over next year or so. If we get that there will be no impact on asset markets," he added.
A larger cut, however, would imply that the Fed believed there was an immediate threat to inflation. But Mr O'Sullivan says this is unlikely. "Mr Greenspan has always gone in very small and gradual moves. Every move from February 1997's rise to last Nov ember's cut has been a quarter of a point. "A larger rise would mean the US equity market would fall quite a bit and that would reverberate around the globe for a couple of weeks and would have direct implications for Telecom."
But if the Telecom price has not already been set by the Government it could mean a lower price which ultimately could mean even larger gains for all Telecom shareholders, he said.
Most markets merely trod water yesterday ahead of the Fed's decision. The euro closed at $1.0330 from $1.0377 a day earlier.
