US interest rates 'not too low'

The Federal Reserve aimed to stop financial contagion spreading

A flagging housing market and rising unemployment were behind a decision to peg US interest rates, according to the Federal Reserve.

Holding the rate at 2% for the second consecutive meeting was the right decision despite rising inflation, minutes of the Fed's decision say.

However most expect that the next rate move will be upwards, the notes added.

There was no indication of when a rate rise may occur - though most analysts expect it will not be until 2009.

Some observers argue that keeping rates at 2% - a four-year low - could make the problem of inflation more severe in the long term.

Comments that officials were concerned about slower consumer and business spending sent Wall Street shares into negative territory on Tuesday.

The decision to hold rates was favoured because "many households and businesses were facing elevated borrowing costs and reduced credit availability" due to fallout from financial market woes and economic problems, the Fed said.

One member, Richard Fisher, who is president of the Federal Reserve Bank of Dallas, called for a rate rise "to help restrain inflation and inflation expectations, which were at risk of drifting higher".

Inflation posed a bigger threat to the economy than fragile markets and slowing economic growth, Mr Fisher argued.