Fearful Fed leaves rates unchanged

America's central bank, the Federal Reserve, responded to fears that the US economic recovery could stall in the coming months when it left interest rates unchanged at their lowest level for four decades.

Despite 11 cuts in the cost of borrowing last year to stimulate growth, the Fed said that it was pegging its key federal funds rate at 1.75% because there was a risk that demand could falter.

The unanimous decision shortens the odds on the Bank of England leaving rates on hold at 4% tomorrow after seven reductions last year.

In a statement accompanying last night's decision, the Fed said that the prospects of weak demand were as likely to be as great as those of higher inflation for some time to come, despite the cheap rates at which individuals and companies could borrow. Financial markets said this was a hint that any tightening of monetary policy could be several months away.

The Fed added that although the economy had been boosted by a build-up in inventories following the savage de-stocking that followed the terrorist attacks, there was still a risk to growth. It said that there had been a "marked swing" in in ventories since the March meeting to discuss rates.

"Nontheless, the degree of the strengthening in final demand over coming quarters, an essential element, is still uncertain.

"Although the stance of monetary policy is currently accommodative, the [federal open market] committee believes that, for the foreseeable future, against the background of its long-run goals of price stability and sustainable economic growth, and of the information currently available, the risks are balanced..."

The US economy grew at an annual rate of 5.8% in the first quarter of the year, with figures out yesterday showing productivity growing at more than 8% a year. Shares have been falling on Wall Street in recent weeks amid anxiety that recovery will be sluggish rather than rapid.

The Dow Jones industrial average, which was up by 100 points in advance of the Fed's announcement, fell back after the decision was announced before reaching positive territory again.

Bruce Steinberg, economist at Merrill Lynch in New York, said: "The necessary condition for a tightening is that the unemployment rate can't be going up, and the unemployment rate may go up a little more."