Fed tightens the money tap

ANY fears that the Federal Reserve has embarked on an aggressive drive to battle inflation will be dispelled by last night's statement.

The American central bank has signalled the turn in the interest rate cycle by raising rates by a quarter point to 1.25%, but remains confident that prices are not running away.

The immediate reaction on the markets was one of relief with the Dow Jones rising and bond yields falling. But no one should underestimate the significance of the moment. The increase in official American rates is the first in four years, even though at the new level they remain close to a post-Second World War low.

In his statement Fed chairman Alan Greenspan, just reappointed to his fifth term, was less elliptical than usual. He pointed out that part of the recent increase in prices is 'transitory', almost certainly a reference to the surge in oil prices, which is largely a result of security concerns in Iraq and across what President Bush calls the broader Middle East.

What is plain is that as the year progresses Greenspan is, in his own words, going to act in a 'measured' way.

He is not going to risk snuffing out confidence and recovery in an election year and receiving the blame for ejecting Bush, a fellow Republican, from the White House.

Rates are still remarkably low and the Fed has a long way to travel before America's expansion - forecast to be 3.5% this year - is in any way threatened. Share markets have no reason to go into a sulk.

Brown's boom

THE British economy is roaring away. Far from missing his upbeat budget growth forecast, Gordon Brown looks as if he may beat it. Revised output data for the first quarter shows growth of 0.7% and year-on-year expansion of 3.4%.

What is really fascinating about this is that consumption has been revised down sharply and the slack is being taken up not just by higher government spending, but by improved overseas trade and a rise in investment.

So good growth, from the productive sectors of the economy, is driving out bad.

Some of the underlying numbers are encouraging too. The savings ratio slipped slightly to 6.1% but is still well above its low point of 4% in 2000.

And companies are paying back debt, with £7.3bn being repaid in the first quarter and £27bn over the last couple of years.

A key to the better growth outcome is a smaller than expected current account deficit in the first quarter at £5.1bn, against the market consensus of £7.3bn.

Given the strength indicated by the latest data, it is no wonder than the Bank of England fears overheating.

The odds on further tightening in the coming months have increased. The Chancellor himself is expected to do some fiscal tightening when he presents his public spending review on July 12.

There are starting to be real worries as to whether the current heady pace of expansion can be sustained without storing up future problems.

Mayhew's exit

THE big question for Cazenove is whether to float or to sell. Certainly, the City's leading broking house has made real strides over the last 12 months as markets and mergers and acquisitions picked up.

Profits are up to £41.7m and Caz has expanded its franchise. It is among those currently defending the honour of Marks & Spencer.

What is most important for Caz is to hold the business together. It is doing this by rewarding staff through bonuses, and investors (58% of whom also are staff) through higher dividends.

This is more important than building capital. The game plan is to find a buyer who will not chew Caz up and spit it out like so many other UK merchant banks (think of Kleinwort and Warburg).

Caz needs to be adopted and ring fenced. It is a tall order in a world of the globalised, bulgebracket players.

But somewhere out there will be the right match, and legendary chairman David Mayhew can canter off into the sunset.

Marks clean-up

THE real concern about the get down and dirty battle for Marks & Spencer is that the protagonists are losing sight of what is really critical.

The customers, staff and private investors in the company care passionately about its future. It is preservation of the brand values, the profits base and - in the case of investors - the total equity returns that are important.

Both sides, chief executive Stuart Rose and bidder Philip Green, need to calm the rhetoric and focus on who is best able to refloat a listing vessel.