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## Fed holds rates but emphasises 'significant concern' on prices

By Krishna Guha in Washington

Published: August 6 2008 03:00 | Last updated: August 6 2008 03:00

The Federal Reserve yesterday pushed back the horizon for possible rate increases by acknowledging continuing risks to growth but emphasised that inflation risks were "also of significant -concern".

Interest rates were kept on hold at 2 per cent and the US central bank provided no signal that it intended to raise rates at its next policy meeting in September, while offering little guidance beyond that.

The statement toned down the hawkishness evident in the minutes of the June meeting, helping stocks to extend a rally fuelled by -falling oil prices. The S&P 500 closed up 2.87 per cent.

Nonetheless, the overall tone was more hawkish than some in the market had expected and the changes were modest considering the turmoil in bank stocks, a -softening in consumer spending and the retreat in oil since June.

Probably as a result, there was only one dissenting vote - by Richard Fisher, president of the Dallas Fed, who again voted for a rate increase.

As expected, the Fed dropped its claim that the downside risks to growth had "diminished somewhat". Yet apart from indicating less confidence in the trajectory of consumer spending, it did not substantially change its assessment of the forces weighing on economic growth.

This suggests policymakers see the risks to growth as continuing rather than having increased sharply in recent weeks.

Moreover, the US central bank made clear that it believed it had already dealt with the risks to growth with pre-emptive rate cuts this year, and "ongoing" liquidity support operations.

Also, the Fed made relatively small changes to its assessment of inflation risk, in spite of the retreat in the price of oil. While it no longer said the inflation risk had "increased", the Fed said "the inflation outlook remains highly uncertain".

In sharp contrast to the discussion of growth risks, the US central bank did not suggest that it was well positioned to deal with the risks to prices.

The net effect is to underscore that while growth risks might prevent the Fed from raising rates in the near term, the central bank has an implicit inflation bias.

Given the starting point - with interest rates at 2 per cent and negative in real terms - the hurdle for rate cuts is very high, whereas the hurdle for rate increases is much lower. Additional reporting by Anuj Gangahar

The Short View, Page 15

Copyright The Financial Times Limited 2008