US rates stay on hold

Fed governor Alan Greenspan: Cautious about future

The Federal Reserve has decided to hold interest rates at 6.5%.

But the US central bank emphasised that it remained open to further rate rises in the months ahead.

In a statement, the Fed made it clear that its so-called policy "bias" remained tilted at inflation.

It said a possible rise in the inflation rate was still the biggest threat to the economy, despite signs of slowing growth.

The widely expected decision by the policy makers in the Federal Open Market Committee leaves the federal funds overnight bank lending rate at 6.5%, while the discount rate on Fed loans to banks remains at 6.0%.

But the bank's tough words on inflation put a dampener on Wall Street and reduced gains on the New York Stock Exchange.

Peaked?

The Fed raised interest rates six times between June 1999 and May of this year to slow the pace of the booming US economy.

The rise in May was a hefty half percentage point.

There has been widespread concern that too fast a rate of growth will result in rising inflation, and fears of further interest rate increases have repeatedly spooked the stock markets.

In the past week, the markets have been made more volatile by uncertainties over the outcome of the presidential election.

Industrial production

On the economic side, a series of reports has lent weight to the belief that growth may be slowing to a sustainable level.

Figures just released showed that industrial production fell 0.1% in October, surprising analysts who had expected a 0.3% increase.

Output at factories was flat at 82.1% of capacity, while production at utilities dropped sharply as unusually warm weather depressed demand.

In the latest Beige Book snapshot of the US economy, official figures also showed that consumer spending had slowed, and that manufacturers had been constrained by higher fuel costs.

Pressures

But with the unemployment rate remaining at a 30-year low of 3.9% in October, there are still concerns that labour shortages may be starting to feed through into stronger wage pressures.

In its statement, the Fed said: "To date, the easing of demand pressures has not been sufficient to warrant a change in the committee's judgement against the background of its long-run goals of price stability and sustainable economic growth...

"The risks continue to be weighted mainly towards conditions that may generate heightened inflation pressures in the foreseeable future."

The Federal Open Market Committee next meets on 19 December.