Fed holds rates steady, shows more worry on prices

The Federal Reserve held interest rates steady and signaled it was in no hurry to raise them, even as it voiced greater concern about inflation.

The decision by the U.S. central bank left the benchmark overnight fed funds rate at 2% and effectively ended an aggressive rate-cutting campaign that the Fed launched in September to put a floor under an economy hit hard by a housing downturn and credit crisis.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the Fed said.

The statement marked a small step toward a tougher anti-inflation stance from a central bank that until recently had been intently focused on the economy's weakness. "While the (Fed) sees greater upside risk to inflation than it has previously, it stopped far short of signaling a timetable or even a commitment for a rate hike," Citigroup economist Robert DiClemente said in a note to clients.

"We see policy settling into a watchful, waiting mode, perhaps considerably longer than markets expect," he said.U.S. stocks finished the session higher and prices for U.S. government bonds ended flat as traders scaled back expectations for a rate hike at the Fed's next meeting in August. 

Interest-rate futures put chances of an August increase at just over 30%, down from about 50% on Tuesday.At the same time, the dollar hit a two-week low against the euro, undercut by the expectation that the gap between U.S. and euro-zone interest rates is set to widen. 

Earlier on Wednesday, a comment from European Central Bank President Jean-Claude Trichet had cemented expectations of an ECB rate hike in July.A Reuters poll of 16 top bond dealers found that most do not expect the Fed to start raising rates until the middle of next year. 

Financial Mirror, 26/06/2008

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