Rates decision: Fed caution disappoints

The US central bank surprised many by keeping interest rates unchanged yesterday but indicated that the risks of a recession might have replaced those of inflation as a result of the sharp slowdown in the US economy.

US investors had expected the Federal Reserve to issue a less equivocal statement on the chances of an interest rate cut early next year. Share prices gave up some of their earlier gains immediately after the Fed released its decision.

In keeping interest rates at 6.5% and insisting that "some inflation risks" persist, the federal open market committee disappointed some . Lawrence Kudlow, chief economist at ING Barings, called the decision "dreadful and stupid" .

Others took solace from the committee view "that the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future".

The FOMC said that it would continue to watch developments keenly, suggesting that it would be minded to act at its next meeting, at the end of January.

In a speech that fuelled optimism about a rate cut earlier this month, Alan Greenspan, the Fed chairman, suggested that the board had changed course.

Yesterday's statement echoed his speech when it stated: "The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further.

"While some inflation risks persist, they are diminished by the more moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased."

Ian Shepherdson at High Frequency Economics said the profits warnings and signs of a slowdown had led the US markets to expect a more pronounced policy shift.