Federal Reserve holds rates as inflation pressures 'moderate'

The United States Federal Reserve kept interest rates on hold last night and rowed back from suggestions it could raise the rate to dampen inflation.

Its description of "moderating" inflationary pressures was new and, although the central bank said it wasn't yet convinced the trend was sustainable, the stock market took that to mean that rates will stay where they are for some months yet. US rates have now been on hold at 5.25 per cent for a year. "Readings on core inflation have improved modestly in recent months," the Fed's open markets committee said in its statement.

In language that was still hawkish in tone, but less strident than previously, it went on: "A sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilisation has the potential to sustain those pressures. In these circumstances, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

In its March and May statements, the bank's Federal Open Markets Committee said that core inflation was "somewhat elevated", a phrase that stock market bulls had hoped would be dropped. The Dow Jones rallied in the half-hour after the Fed decision before closing marginally lower on the day. "It's a baby step towards a more neutral stance on rates," said Andrew Busch, the global foreign exchange strategist at BMO Capital Markets in Chicago. "There won't be any increase in rates anytime soon."

The Fed's decision came after revised figures for GDP in the first three months of the year showed the US economy grew at a faster rate than had previously been recorded. The annual rate was revised up a 10th of one percentage point, to 0.7 per cent.

That was still the weakest rate of expansion for more than four years. Within the figures, an inflation gauge that is closely watched by the Federal Reserve was unexpectedly revised upwards. The personal consumption expenditures price index (PCE), which excludes volatile food and energy prices, was 2.4 per cent in the first quarter, up from the prior estimate of 2.2 per cent.

Yesterday's revisions were the third and final measure of economic activity in the first quarter. A separate report from the Labor Department showed strong, stable conditions in the labour market, with the jobless rate up 13,000 last week to a seasonally adjusted 313,000, lower than expected.