Why Greenspan was right to wait

WHEN retail sales are motoring ahead at 4.8% a year, do you need to stimulate activity any further? The US Federal Reserve Bank had that decision to make last night.

Unsurprisingly it decided that the answer was no and that its guideline funds rate should stay at 1.75%. But it warned that the risks are that the economy may weaken, suggesting further cuts may come.

The Fed is probably right to wait. Interest rates are already the lowest for 40 years. US consumers are still spending. Car sales in July were 7.5% ahead year on year.

The trouble lies not in shopping malls, but in corporate America. Bosses are more worried about staying out of jail than investing. The share plunge has taken a huge bite out of the wealth of US households.

South America has problems, too. Early hopes that Brazil would be saved by last week's £20bn rescue package have receded. A rate cut would help banks to cope with their Latin losses. But the Fed knows it still has time to cut if the crisis worsens.

The Dow fell and markets may now give back some of their recent gains. There are huge doubts about when company profits will recover, and fears that further accounting shocks may emerge. Technology is still deep in gloom, with recovery hopes shifting towards 2004.

We can take comfort that shares have rallied after all the shocks. If these have ended, markets could see modest gains towards year end. But that is a big if.

Prices in check

UNDERLYING UK inflation rose 2% in the year to July, above the 1.8% expected. But there is little cause to worry. Despite erratic changes in food and oil prices, goods inflation is thoroughly subdued, and only the price of services (such as holidays) is rising fast.

Simon Rubinsohn, of Gerrard, sees inflation at 2.2% by year end, well below the Bank of England's target. In technology and clothing, many prices are falling. But we show few signs of slipping into Japanese-style deflation. That is just as well. Perhaps we should be thankful to all those hairdressers, nightclubs and tour operators who keep prices pushing upwards.

Energy loss

BRITISH Energy's problems worsened dramatically as it was forced to shut the second of its two reactors at Torness near Berwick following a failure of its gas cooler. The first reactor has been off since mid-May, and for 'prudence' BE is shutting two more at Heysham, Lancashire.

Philip Hollobone, at SG Securities, says BE's current year output could fall 6.6%. In theory, this could ease the supply glut which has cut energy prices 20%. In practice, the Heren Report, which monitors daily trading says the market is so oversupplied that prices barely moved.

This banishes BE's hopes of making money in the year to March. Brokers predict losses of £50m to £70m. The big worry is the 8p dividend, which costs £50m. SG thinks it will be halved. If so, and BE is rated on an 8% yield, the shares are worth just 50p.

BE must sort out its reactor problems on its own. But its difficulties will add to the pressure for government concessions on its climate change levy and rates payments, which cost it £100m a year.

Ministers must now be uneasily conscious of the risks. BE's market value is just £390m, 4p in the pound of the cost of building its nuclear stations.

Its North American operations, which make money, are probably worth over £800m. In theory, it would be profitable for it to move Stateside and hand back the keys of its UK stations.

Nuclear economics have always been a walk on the wild side. Ministers must be getting uneasy about the prospect that the trail is leading back to the taxpayer.