Fed keeps rates on hold, despite inflation fear

The Federal Reserve yesterday held its key interest rate steady, but warned once more that inflationary pressures could force a rate increase in the near future. It also appeared to upgrade slightly growth prospects for the economy in the coming months.

Wrapping up a two-day session, the central bank's policy-setting Federal Open Market Committee held the federal funds rate steady for the third month at 5.25 per cent, as markets had expected. The Dow index, down 30 points before the announcement, rebounded to show a slight gain on the news, briefly hitting an intra-day high of 12,143. The bond market also moved ahead.

In its closely watched accompanying statement, the FOMC - headed by Ben Bernanke, the Fed chairman - said growth had slowed over the course of the year.

"Going forward, however, the economy seems likely to expand at a moderate pace," it added. Inflation might increase in the short term, "but seems likely to moderate over time". In the now-familiar mantra since Mr Bernanke took over in February, the Fed declared that if a further increase was required, its extent and timing would be determined by economic data.

Since spring the economy has slowed, largely because of a sharp downturn in the long-buoyant housing market. GDP figures due tomorrow could show growth of little more than 2 per cent.

This month's Fed "beige book" report this month showed most regions of the US were still experiencing growth - that might now accelerate as tumbling fuel prices feed into the wider economy. Stripped of energy, core inflation is running around the upper limit of the central bank's assumed target rate of 2 to 2.5 per cent.

"Falling energy, a sluggish housing market and slowing economic growth should bring inflation down soon," Peter Morici, a professor of business at Maryland University, said. Raising rates further would serve no useful purpose, he added. "The Fed should not change the interest rate policy... before its January meeting."