Fed keeps rates on hold - for now

The US Federal Reserve kept American interest rates on hold last night, but unsettled the markets by leaving the door open for a rise in the cost of borrowing later on this year. A rattled Wall Street initially slumped on the announcement, as traders reacted with disappointment to the Fed's hawkish stance. The Dow Jones Industrial Average, which was trading up more than 100 points ahead of the decision, was down almost 1% in afternoon trading but ended the day virtually unchanged.

`The tightening bias doesn't do a lot to clear the air of uncertainty ahead. While interest rates stay the same, the anxiety level appears to increase,' said Alan Ackerman, market strategist at Fahnestock.

Debt-laden technology stocks traded on the Nasdaq exchange, which are more sensitive to interest rate increases, also gave up early gains.

The Fed, which has raised rates in two out of the last three months, said in an accompanying statement that it was biased in favour of further upward moves because of concerns that the record low in unemployment could prompt wage inflation.

Improved productivity in the US had given room to keep rates on hold despite the blistering pace of expansion in output this month. But the statement warned that the `decreasing pool of workers willing to take jobs' could contribute to inflation pressures and undermine the economy's performance. The Fed said that the bias shift did not signify a commitment to near-term action.

The committee would need to evaluate additional information on the balance of aggregate supply and demand and conditions in financial markets.'

Last night's decision may help tip the balance in favour of no change in European interest rates when the Bank of England and the European Central Bank announce their decisions tomorrow. Richard Berner, chief US economist at Morgan Stanley Dean Witter, the US investment bank, said the Fed's decision was in line with expectations. However, he said that there was `better than even chance' that the central bank would decide to raise rates in November.