Federal Reserve leaves US interest rates on hold but markets remain in turmoil

The US Federal Reserve Board left its key interest rates unchanged yesterday, despite a further decline in consumer confidence and new falls on Wall Street, but hinted it could cut them later if the American economy took a sharp turn for the worse.

Disappointment at the decision saw the benchmark US Dow index slump 2.4 per cent to close at a four-year low, after growing fears over war in Iraq, rising oil prices and the state of the US economy conspired to drive down share prices.

As expected, the US central bank's policy-setting Federal Open Market Committee voted to hold the benchmark federal funds rate at 1.75 per cent, where it has been since the start of the year. Two of the 12 committee members, however, dissented and urged a cut in rates. Commercial banks are likely to hold prime lending rates at 4.75 per cent, their lowest since 1965.

The committee said that in time, the current low level of rates coupled with strong productivity gains "should foster an improved business climate". It noted a moderate revival in aggregate demand.

But the committee warned, in a clear reference to the Iraq crisis weighing on market sentiment, "considerable uncertainty exists about the extent and timing of the expected pick-up in production and employment, owing in part to the emergence of heightened geopolitical risks".

The key factor in staying the Fed's hand was uncertainty about the course of the economy. Though the pace of growth has faltered, a continuing buoyant housing market, fuelled by low mortgage rates, has helped offset the decline in stock values.

Paradoxically, consumer confidence data may have also played a part. The Conference Board, a private business research group, said its index fell to 93.3 in September ­ the lowest level since November 2001 ­ from a revised 94.5 in August. But the decline was less than analysts expected, and stocks recovered slightly in the immediate aftermath of its publication. The index is down 17 points from its recent peak of 110.7 in March.

But thereafter Wall Street continued to drift lower, amid ever louder talk of a second Gulf war and disappointing retail sales. Chain store sales were down 1.7 per cent last week, the Bank of Tokyo-Mitsubishi and UBS Warburg reported.

Across the Atlantic, the FTSE 100 index of leading UK shares ended the day 68.3 points down, having at one point fallen by more than 100 points to its lowest level in almost seven years. Gilts yields plunged to some of the lowest levels seen in half a century while the price of gold, a traditional safe haven in times of increased international tension, rallied to close at its highest level in almost three years.

The yield on two-year UK gilts fell to its lowest level since 1954, while gold spot prices climbed to $327.25 an ounce

At the same time the rally in oil prices continued to gather pace, fuelled by the Government's publication of its 55-page dossier on Saddam Hussein's weapons of mass destruction.

US benchmark crude futures rose at one point to $31.39 a barrel ­ the highest level since February 2001 ­ while North Sea Brent hit its highest level since the 11 September terrorist attacks, before falling back slightly to end at $29.11. "War mongering and weather-related factors make this look like a runaway train," one oil analyst said. "Stand in front of it at your peril."

The jump in oil prices came despite evidence that exports of Iraqi crude had doubled last week.

On the London market, banks accounted for a large proportion of the decline in the FTSE 100, with Barclays leading the sector lower as a fall in profits at Lehman Brothers added to concerns about bad debts and difficult trading conditions.