Deflation fear keeps Fed rates on hold

US move is unlikely for a 'considerable period', but MPC member hints at rise in British rates in the near future

The US Federal Reserve brushed aside mounting speculation of an imminent economic rebound yesterday, warning that the threat of deflation still outweighed that of a jump in inflation.

The central bank unanimously decided to keep interest rates on hold at 1 per cent, as had been widely predicted. But it disappointed hopes it would drop its gloomy outlook on the economy. Instead it repeated ­ almost verbatim ­ its statement of a month ago that rates would probably be heldfor a "considerable period".

"The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal," it said after a five-hour meeting. "In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period."

The only shift in language was a description of the labour market as "stabilising" rather than "weakening" as it did in its September statement.

Stock markets, which had already risen on the back of strong figures on consumer confidence and factory orders, made further gains as traders hailed the news that rates would stay low for some time.

The Dow Jones extended its gains after the decision, ending up 1.4 per cent at 9,748, while technology-related stocks on the Nasdaq jumped 2.6 per cent. The dollar extended gains against the euro as stocks rose, ending the day at $1.166.

Henry Willmore, chief US economist at Barclays Capital, said: "They chose not to send a signal to the market that their assessment is changing and that tightening could happen sooner rather than later."

Douglas McWilliams, chief executive of the Centre for Business and Economics Research in London, added: "The statement could push the dollar down 2 to 3 per cent and push up US equities by a similar amount."

There are numerous signs suggesting a robust recovery has at last begun to take hold. Economists say the economy grew by about 6 per cent in the third quarter, the fastest pace since late 1999. Meanwhile households grew much more optimistic in October, according to the closely watched Conference Board survey.

They were more bullish about the current state of the economy, their expectations and over the labour market, it showed. Orders for durable goods rose 0.8 per cent, the Commerce Department said. It revised August's data to show a 0.1 per cent decline instead a 1.1 per cent drop.

The Fed's message was in a stark contrast to remarks by a member of the UK's Monetary Policy Committee that pointed to another tight decision on rates next month. Stephen Nickell, one of four members to call unsuccessfully for an increase three weeks ago, said the economic revival was strong enough to justify a move.

But he urged the MPC to "go carefully" in a sign there is little enthusiasm for sharp increases. He denied a rise would be premature, saying it was unlikely to trigger a crash in either consumer confidence or house prices. "Prospects for a significant economic recovery are strong enough to justify a rise in rates," Mr Nickell told The Scotsman newspaper yesterday.

"The service sector is strong and the Government is Hoovering up workers. My view is that a 25 basis points move on rates would not smash confidence."

He said fears that raising interest rates would spark a crash in house prices were misplaced. "The danger in the debt is basically whether people can service the debt. At the moment, I don't see that as a serious issue," he told The Herald newspaper during a visit to Scotland.