WASHINGTON, Aug 9 (AFP): The Federal Reserve has finally suspended a run of interest rate hikes stretching back more than two years, explaining that slowing economic growth will vanquish the menace of inflation.
But the reprieve for investors, consumers and businesses around the world could be short-lived, many economists believe.
The central bank's Federal Open Market Committee (FOMC) Tuesday voted, with a lone dissenting voice, to keep the benchmark US cost of borrowing at 5.25 per cent.
It was the first time since June 2004 that the bank has left the federal funds rate unchanged.
But it did leave itself room for manoeuvre, having brought the headline rate up from a 46-year low of 1.0 per cent to squelch energy-induced inflation in the world's largest economy.
The FOMC said economic growth had "moderated", reflecting a cooler housing market and the impact of record-high energy prices.
While inflation readings had been "elevated" in recent months, the FOMC said, price pressures "seem likely to moderate over time" because of past rate hikes and other factors restraining demand.
"Nonetheless, the committee judges that some inflation risks remain," the FOMC added, saying that the "extent and timing of any additional firming" would depend on both inflation and economic growth.
Wall Street share prices erased earlier gains to close lower on the Fed's indication that it would remain vigilant against inflation, even as it holds rates steady for now. The dollar was steady on currency markets.
"One way or the other, I think it's unfinished business," commented Stephen Buser, professor of business finance at Ohio State University.
"They indicate it is a pause, rather than the end," he said.
Astronomic energy prices are stoking price rises in the industrial and consumer pipelines. But Fed chairman Ben Bernanke has stressed that he believes cooling growth should curb inflation in the coming months.
Data out Tuesday showed that US workers' productivity slowed abruptly, to grow by just 1.1 per cent, in the second quarter. But at the same time, unit labour costs staged the sharpest jump since the end of 2004.
The report was consistent with a raft of figures that have pointed to the US economy slowing down on the one hand but building up inflation on the other.
Some analysts said the Fed under its novice chairman had left itself vulnerable to the shifting winds of economic news, rather than setting out a consistent policy for the markets to follow.
"If they have to start hiking again, it means they didn't do enough beforehand. Once you raise the spectre of inflation, you've got to slay it," said Joel Naroff of Naroff Economic Advisers.
US economic growth in the second quarter was a disappointing 2.5 per cent, compared to a booming pace of 5.6 per cent in the first three months of the year.
Buser at Ohio State said "rookie mistakes" by Bernanke, who succeeded veteran Fed chief Alan Greenspan in February, were to blame for the central bank sending out mixed messages to the markets.
But other pundits said the Fed's warnings on inflation were only rhetoric for public consumption.