US keeps interest rates on hold

The Federal Reserve last night left US interest rates on hold at their 45-year low of 1.0 per cent, but warned of the risk of falling prices and said rates would stay low for a "considerable period".

The decision had been widely expected but the financial markets gave a lukewarm reaction after the central bank issued a downbeat statement with its decision.

The Fed said it was confident that low borrowing costs and strong productivity growth would fuel a recovery but hinted it was still worried about the threat of deflation.

"The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal," it said in a statement. "In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level."

It said consumer spending was "firming", but that labour markets were "mixed" while rises in consumer inflation and business prices were "muted". It said on balance it believed the risk of inflation becoming "undesirably low" was likely to be the "predominant concern for the foreseeable future".

"In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period," it said.

The markets has been nervously awaiting the announcement in the wake of the Fed's decision in June to cut rates by less than expected, which triggered a 40 per cent surge in bond yields, raising the cost of long-term borrowing.

David Sloan, senior economist at 4CAST analysts in New York, said the most important message was that there was no sign of any rise in interest rates for the foreseeable future. "The Fed's view of the economy has not changed from the last meeting but in order to calm the financial markets they have stressed that the accommodative stance can be maintained for a considerable period," he said.

On Wall Street, the Dow Jones dropped into negative territory straight after the decision but recovered to be 13 points ahead after half an hour.

Bond prices rose briefly but fell as investors took profits.