String of interest rate rises ends in US

WASHINGTON - The US Federal Reserve today halted a more than two-year string of interest rate rises, holding its benchmark rate steady while it gauges whether a slowing economy will keep inflation in check.

If inflation risks persist, the Fed indicated it might resume raising rates.

The central bank's policy-setting Federal Open Market Committee voted to keep the federal funds rate target at 5.25 per cent, pausing a cycle that had taken the rate steadily higher in 17 successive hikes since mid-2004.

One member of the committee, Richmond Fed President Jeffrey Lacker, voted against the move. The Fed provided no explanation for his dissent.

Financial markets took the Fed's action in stride. Stock prices were modestly lower an hour after the decision was announced and bonds were mixed amid slight price movements.

Recent economic indicators have pointed to a downshift in the economy, led by a cooling housing market, but wages and prices continue to rise and the Fed made clear its optimism about inflation was wary and conditional.

"Inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand," the Fed said in a statement issued after the meeting.

STILL SEE RISKS

"Nonetheless, the committee judges that some inflation risks remain," the central bank added, saying any further rate moves would depend on the outlook for prices and growth.

While the Fed action offered some drama, it did not surprise markets. Policy makers did not signal they were calling off the rate-rise campaign, only that they were preserving their ammunition for use if needed.

"They did pretty much what was expected by leaving rates unchanged, but more importantly if you look at the statement they are certainly leaving the door open to the possibility of further hikes if needed," said economist Rick Egelton of BMO Financial group in Toronto.

As the Fed meeting began, the government reported that growth in productivity, or hourly output per worker, slowed to a 1.1 per cent annual rate in the second quarter of this year from 4.3 per cent in the first quarter.

The key reason was a 4.2 per cent jump in unit labor costs, the fastest since the end of 2004 and well above the first quarter's 2.5 per cent -- a reminder of inflation's durability despite a moderating expansion.

At the conclusion of its previous meeting on June 29, the Fed cited steady productivity gains as having helped curb inflation expectations, a conclusion that may come into question after the softer second-quarter productivity performance.

This time, there was no reference to productivity and some analysts predicted its weakening pace was one reason the Fed will be obliged to raise rates again later this year.

"I'm a bit surprised to see the Fed saying inflation was moderating while we are having signs, including today's productivity numbers, that inflation is not decelerating," said economist Tim Rogers of Briefing.com in Boston, adding he expected rate rises to resume later this year.

Soaring petrol costs and oil prices that topped $77 a barrel earlier this week are causing anxiety among consumers.

In recent speeches, Fed officials have cited softening data and stressed the full impact of prior increases in overnight interest rates had yet to be felt.

They have also expressed hope that slowing growth might dampen upward price pressures.

"A sustainable, noninflationary expansion is likely to involve a modest reduction in the growth of economic activity from the rapid pace of the past three years," Fed Chairman Ben Bernanke told Congress last month in semi-annual testimony on the state of the economy.

In the second quarter, the economy grew at an annual clip of 2.5 per cent, much slower than the brisk 5.6 per cent pace in the first three months of the year.

And last week, the government's employment report showed only 113,000 jobs were created in July, down from 124,000 in June and below the first quarter's monthly average 176,000.

In addition, the previously soaring housing sector has lost altitude as would-be buyers face stiffer financing costs and builders reduce groundbreaking in response to weakening sales.

Despite signs the expansion is losing steam, consumer prices have kept rising.

The Fed's preferred inflation gauge, the core personal consumption expenditures price index, which excludes food and energy, rose 2.4 per cent in the year through June -- well ahead of the pace perceived to be the Fed's comfort zone.

- REUTERS