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WASHINGTON: The Federal Reserve on Wednesday kept its base interest rate at 2.0 percent, saying the likelihood of a sharp economic downturn has diminished while inflation risks have increased.
The Federal Open Market Committee's (FOMC) 9-1 decision reinforced expectations that the central bank is leaning slightly toward a hike in rates but is not yet ready to make such a move.
The action marked the first pause by the US central bank since it began a series of aggressive rate cuts last September in the federal funds rate.
The panel echoed comments from Fed chairman Ben Bernanke that the world's biggest economy remains weak but that the risk of a calamitous meltdown had eased.
"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the FOMC statement said.
Dallas Fed president Richard Fisher dissented, calling instead for an increase in the funds rate.
Most analysts said the Fed appears to be on hold until it gets a clearer picture of the economy.
"There is nothing in this statement that commits them to a near-term hike," said Josh Feinman, chief economist for DB Advisors, the institutional asset management unit of Deutsche Bank.
"Their options are completely open ... They are OK with the notion that the market thinks the next Fed move is going to be a hike, but I don't think they are laying the groundwork for a hike at the next meeting in August."
Paul Ferley, economist at RBC Capital Markets, said the new statement includes "a little more emphasis on the inflation risks versus growth risks."
"It implies slightly greater bias toward tightening, but I think the Fed will remain in a watching mode."
Ferley said the most likely scenario "is that fed funds will hold steady through the remainder of this year" with no major change in economic conditions.
Robert Brusca at FAO Economics said the Fed appears to be banking on a scenario in which the economy gathers steam, helped by tax rebates from the government's 168-billion-dollar stimulus programme.
"The Fed seems to be focused on a strengthening economy. But assuming does not make it so," he said.
"If the rebate checks come up short we are in a real pickle, since housing has showed no sign of stabilisation, and trade gap progress is threatened by weakening global growth and still-high energy prices."
Brusca said the Fed's tilt toward inflation could push up bond and mortgage rates in an economy that remains fragile.
"The Fed is all the side of getting tighter," he said. "This is not where I see the policy risks, that's for sure. I think the Fed is going to chase market rates in the wrong direction with this view of the world."
The FOMC statement said recent data "indicates that overall economic activity continues to expand, partly reflecting some firming in household spending" but the labour market had "softened further" and financial markets "remain under considerable stress."
The panel said it "expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."
The central bank has slashed rates since last September by 3.25 percentage points, but officials are signalling that cycle of cuts is probably over, and that inflation is now the biggest threat.
"Going into the announcement, we thought that the Fed would like to temper expectations for rate hikes, but had to be careful not to sound too easy on inflation," said Aneta Markowska, an economist at Societe Generale in New York.
"The statement does a good job balancing these objectives and we believe that it should at least buy the Fed some more time.
"With rising unemployment, lingering credit concerns, ongoing housing contraction and consumers being squeezed by energy, the environment is just not ripe enough for a rate hike cycle. We look for a status-quo on rates through 2008. Policy normalisation can occur in 2009 when the economy and the financial system are on a more solid ground." - AFP/de
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