THIS piece was written yesterday lunchtime prior to the Federal Reserve Board’s open market committee meeting on interest rates. Consensus was that there would be no change in US rates, but then consensus does have a habit of being wrong. We shall see.

Whether the rate changed or not, we do expect a statement that removes patience from the rhetoric and possibly a lead as to when a move may come.

After all, Fed chairman Alan Greenspan has now dismissed deflation as public enemy number one. Accordingly, a pre-election rate rise is almost a racing certainty.

The dramatic rise in US bond yields also points to an increase in rates, indeed, US bonds appear to be pricing in at least three quarter-point increases.

However, the Fed now faces a rather difficult balancing act.

If we start with the premise that it is some way behind the curve, it needs to plot a course to catch up without provoking panic.

The US economy has grown strongly enough to spark a mild upturn in inflation – clearly rampant energy prices have been the driving mechanism.

Evidence is building of strong job growth. Next week’s employment payroll figures are likely to add to the current uncertainty in the marketplace as most now believe strong job growth means higher interest rates.

Hence we return to the Fed conundrum – how do we get interest rates to the right level without spooking the markets?

Mr Greenspan and his colleagues are really going to earn their money over the next few months.

The anticipation of higher rates has, for now, brought to an end the rally in the euro.

No longer do I hear 1.30/1.50 or higher for the euro/US dollar exchange rate, suddenly it’s 1.05 to 1.10, which serves only to remind me how fickle currency forecasting can be.

I was never comfortable with 1.30/1.50 but, equally, I am not convinced about 1.05/1.10.

My sense of things is that we are likely to see less volatility in the markets – at least for the time being.

*Jim Goodey, director & chief investment officer.