Fed keeps US rates on hold amid optimism on productivity

The Federal Reserve held US interest rates steady yesterday, confirming market expectations that it considers the risk of inflation to be waning.

The Federal Reserve held US interest rates steady yesterday, confirming market expectations that it considers the risk of inflation to be waning.

But the Fed warned it could raise rates if price rises feed through into the US economy. It "remains concerned about the risk of a continuing gap between the growth of demand and potential supply at a time when the utilisation of the pool of available workers remains at an unusually high level," it said in a separate statement. The rate remained at 6.5 per cent.

There have been six increases in interest rates since June 1999, as Alan Greenspan, the Fed chairman, and his colleagues tried to head off what they saw as the risk of inflation in a rapidly growing US economy. But the latest figures seem to show that if there was a threat of price rises, it is fading.

"Recent data have indicated that the expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy's potential to produce," the Fed said. "The data also have indicated that more rapid advances in productivity have been raising that potential growth rate as well as containing costs and holding down underlying price pressures."

The Federal Reserve Open Market Committee, the policy-setting arm of the Fed, said that it still believed that inflation was a greater risk than recession.

"Against the background of its long-term goals of price stability and sustainable economic growth ... the Committee believes the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future," it said.

The markets had been expecting no action and registered neither delight nor shock. There is a Fed meeting in October, and the markets are still betting that the central bank will not move then either. It last increased rates in May.

The pound had another bad day against the dollar, meanwhile, at one point sinking to as low as 1.4794 before recovering a little to trade at about 1.48.