Fed Holds Key Interest Rate at 2%

The US Federal Reserve held its key interest rate at 2% last night as its concern about rising inflationary pressures outweighed worries about sluggishness in the American economy.

The central bank last cut the federal funds rate in late April, having lowered it from 5.25% since last September in an attempt to prevent the credit crunch and housing slump tipping the world's biggest economy into recession.

The Fed said: "The committee expects inflation to moderate later this year and next year.

"However, in light of the continued increase in the prices of energy and some other commodities, and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

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

Hours before the Fed announced its decision, data showed that sales of new homes fell again last month to their lowest in 17 years, suggesting the US housing market downturn has further to run.

That followed news yesterday that house prices had fallen more than 15% in the past year and consumer sentiment had collapsed.

"Already poor market conditions have deteriorated further in recent weeks with mortgage rates climbing half a percentage point, the labour market sliding further and household confidence in the doldrums," said Dimitry Fleming, economist at ING Financial Markets.

But Fed officials, led by chairman Ben Bernanke, have little room to cut rates further because rising world food and oil prices have been pushing up inflation.

"Given the uncertainty about both upside and downside risks, the Fed is likely to stay on hold indefinitely," said Deutsche Bank economist Joseph LaVorgna.