Fed pegs rates after year of cuts

The US Federal Reserve ended its year-long campaign of interest rate cuts last night, keeping borrowing costs unchanged after government figures showed the economy recorded a surprise increase in output in the final quarter of 2001.

Policymakers on the Fed's open markets committee opted to keep rates on hold at 1.75% but warned in a statement accompanying the decision that there were still signs of weakness in the world's largest economy. "The degree of any strength in business capital and household spending... is still uncertain," the US central bank cautioned.

Analysts said that if recent signs of recovery proved illusory the Fed was clearly prepared to resume its aggressive campaign of rate cuts which saw it reduce borrowing costs in every one of its eight meetings last year, and three times between formal gatherings.

"The risks are on the downside, leaving the door open for more cuts if necessary," said Wayne Ayers, chief economist at Fleet Boston Financial.

Fed chairman Alan Greenspan told Congress last week that the economy appeared to be turning a corner and a spate of more upbeat data has supported this view.

Ahead of the Fed decision, the US commerce department published figures showing that the economy expanded at an annual rate of 0.2% in the three months after the terrorist attacks last September, confounding economists who had been expecting a second quarter of falling output.

The downturn could turn out to be one of the mildest since the second world war. The only negative quarter for GDP during the present slump occurred in the third quarter, when it contracted 1.3%.

"With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favourable and monetary policy accommodative, the outlook for economic recovery has become more promising," the Fed statement noted.