The markets had expected a progressive increase in rates, and the breather has come as a relief. As a matter of fact, it is contradictory to increase rates by 25 basis points and at the same time say that there won't be further increases in the next two months. The markets move on expectations, and unless expectations of a rate hike get built into the stockmarket, it will not go down. At the same time, it is easy to understand the Fed's dilemma. It feels that the market is overheated, and wants to engineer a soft landing. But it is acutely conscious that the buoyancy in the bourses all over the world has been the result of a policy of monetary expansion sparked by Alan Greenspan's pioneering rate cuts. A credit boom in the US, together withthe "wealth effect" has resulted in unprecedented demand, with consequent boom conditions in the US economy. The Fed is afraid that rate increases could hurt that prosperity.

While that fear is very real, the Fed's concern with inflationary pressures seems to be premature. True, international commodity prices have bottomed out, and oil prices have increased. Wage pressures too are beginning to show up. But these factors have so far not found reflection in the inflation figures. The fact remains that growth in the rest of the world is yet to pick up, barring the baffling first quarter blip in Japan. Until that happens, inflation is unlikely to rear its head.