Investors worldwide are practising their deep breathing. Next Tuesday's meeting of the US Federal Reserve's open market committee could shift financial markets into a different gear. Trouble is, no one is sure which one. Until then, relaxation techniques are order of the day.
The committee's remit is to control US inflation. Its principal policy instrument is short-term interest rates. By adjusting the cost of money, economic growth is slowed or accelerated as appropriate, in turn cooling or stoking the inflationary fires.
That is the theory. It has always been recognised that the time lags between rate changes and their impact on inflation are lengthy and cloud analysis of the effectiveness of monetary policy. The rapid technological development of modern economies chucks a further spanner into the analytical works.
The Fed has been raising US interest rates steadily since mid-1999. Thus far it has had no discernible impact on the pace of expansion. The US economy grew at an annualised rate of 5.3% in the first three months of this year. Smoking!
Occasionally economic releases pop up on traders' screens that hint at a slowing of the economy. The latest such statistic arrived on Thursday. Retail sales dropped by 0.2% in April. But the preponderance of data points to continued expansion at a rate consistent with rising inflationary pressure.
The authorities may not have slowed the economy - yet - but they would be quick to claim some credit for the continued quiescence of inflation.
Again, occasionally statistics sound alarm bells, but underlying consumer price inflation running at 2.4% is remarkable considered alongside the rate of economic growth.
Nearly all Wall Street economists expect the committee to depart from its gradualist approach and raise rates by 0.5%. The Organisation for Economic Co-operation and Development has weighed in with a recommendation that US rates be cranked up by a full percentage point.
That the Financial Times, with at best a patchy record of anticipating policymakers, declared "that the Fed should raise rates by half a percentage point at next Tuesday's meeting is surely beyond argument".
Expectations and eventual reality are very different things, however. Consider the UK monetary policy committee's decision last week to leave rates unchanged in the face of apparently over whelming opinion. Economists tend to colour their judgments about what the authorities will do with their opinions about what they should do. Not surprisingly, the policymakers are likely to believe they have sufficient capability to make their own minds up.
UK fund manager Schroders courted publicity this week with the claim that it has developed a computer model with a better record of forecasting the MPC's decisions than the average of economists. The model's lack of emotion and professional pride probably account for its high hit rate.
Some seized on Schroders' model to question the need for the MPC to be so large - and expensive - to run. That misses the point. Only if the model is 100% accurate could man be replaced by machine. Policymakers must be able to weigh all the available data and then choose to follow their gut instinct instead.
The committee rarely has the stomach to test the US economy and its financial markets with a half point move in interest rates. Of 68 rate moves since 1987 only 10 have been of 0.5% or more. Of the 34 rate rises only 6 have been 0.5% or more. There was a time when the Fed chairman, Alan Greenspan, prided himself on bamboozling the markets. In his old(er) age he has opted for predictability of policy so as to smooth the impact of higher interest rates on asset values.
Greenspan's quandary is that he wants to ease the effect of a booming stock market on consumer spending in the US without triggering a crash which drags the economy into a slump. A drip, drip of small rate rises has been his solution.
For all the advice proffered by economists and journalists, it is far from clear that the Fed's gradualist approach is failing.
It does take time for tighter policy to really take hold. A sharp rise in rates now could be overkill - especially as the impact of the crash in technology shares on consumer confidence is still unknown.
My bet, for what little it's worth, is that the committee will opt for a quarter point rise, and that Wall Street will let the good times roll on.
Ed Warner is chief executive of Albert E Sharpe Securities
