The Federal Reserve called a halt to more than two years of relentless interest rate rises yesterday, signalling that the US economy was slowing sufficiently to allow a pause in its battle against inflation.
In what was one of the most finely balanced decisions for years, the Fed kept rates on hold at 5.25 per cent after 17 consecutive quarter-point increases.
Its decision came after a slew of economic data which showed the US economy slowing more sharply than predicted and as Wall Street and the business community began to fret that the Fed may already have tightened monetary policy too far.
But the decision was complicated because inflation has remained stubbornly high, and the vote to keep rates steady was not unanimous. The jump in oil prices, which has pushed up petrol prices and caused consumers to rein in their spending, has also contributed to rising prices across the economy.
In the accompanying statement, which struck a more dovish tone than in many months, the Fed predicted "inflation pressures seem likely to moderate over time". Although it held out the possibility that it could tighten again if necessary, the statement in effect waved away some of the more worrisome predictions of a resurgence in inflation.
The clincher appeared to be last month's GDP figures for the second quarter of the year, which showed the US economy growing at 2.5 per cent. That was much weaker than expected and a sharp drop from the pace of GDP growth in the early part of the year, which had been 5.6 per cent.
The Fed's dovish tone sparked fears that it may be more worried about the economy than Ben Bernanke, the chairman, has previously let on. The Dow Jones ended down 45.79 points at 11,173.59.
The Fed said economic growth had moderated because of a cooling housing market, high energy prices and the cumulative effects of its long series of rate rises since June 2004.
"The high levels of resource utilisation and of the prices of energy and other commodities have the potential to sustain inflation pressures," it said. "However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand."
The committee voted 9-1 for a pause, it said. The president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, a long-time hawk, is the first dissenter since Mr Bernanke became chairman in February.
Oil price rises have been stoking some measures of inflation this year, and some economists worried that higher petrol prices are driving employees to seek wage increases.
Economists were split on whether the Fed would make one more increase at either the September or October meeting. The bond market, though, moved to reflect a higher likelihood that the record sequence of rises is complete and that next year will bring lower interest rates.
David Jones, the head of DMJ Advisors, a Denver-based consulting firm, said: "I think the odds are slightly against another rate hike at the moment. The Fed is putting its primary emphasis on the weakening economy and less emphasis on inflation."
Crude oil retreated from its all-time highs, after the US energy department said it may not be necessary to keep all of the Prudhoe Bay oilfield in Alaska shut while repairs to pipelines are carried out. BP began to shut down the field - the largest in the US - on Sunday after finding corrosion had led to another oil leak, and the Energy Secretary Sam Bodman predicted it would take until January before it returned to full production of 400,000 barrels a day. Prudhoe Bay represents 8 per cent of total oil production in the US.Reuse content