Fed keeps rates on hold as deflation fears recede

The Federal Reserve signalled it was less concerned about the prospect of deflation than it has been at any time since the financial crisis erupted with full force last autumn, and reiterated that it saw signs of the US economy improving.

Nonetheless, the US central bank kept interest rates at rock-bottom levels and gave no sign that it was in a hurry to claw back the money it has pumped into markets to fight the crisis.

The Fed's open market committee (FOMC) reiterated only that it was keeping the size of the bank's balance sheet under review and would make adjustments, "in light of financial and economic adjustments". There have been growing calls for the Fed to explain how it will pull the money out before it can ignite inflation.

In its statement, the FOMC again said the slack in the economy would keep prices low. However, it dropped language about the threat posed by inflation below levels consistent with price stability – a reference to deflation.

As the two-day FOMC meeting wrapped up, its chairman, Ben Bernanke was coming under unprecedented political fire for his handling of the Bank of America-Merrill Lynch merger last December. Republican members of the House oversight committee yesterday released internal memos that they say show the Fed engaged in a "cover-up" of those discussions. "The committee has already learned that Ben Bernanke... made inappropriate threats to fire Bank of America management unless they went ahead with the 'shotgun wedding' that was the Merrill Lynch acquisition," Darrell Issa said. "The Fed also engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies."