The US Federal Reserve tonight dealt a further blow to lingering market hopes of an early cut in American interest rates, making clear that it remains on alert over inflationary risks in the world’s biggest economy.

As it confirmed that it was again holding its key Fed Funds target rate at 5.25 per cent, the level reached last June after 17 straight increases, the US central bank conceded that inflation pressures had eased a little. Its policy-making Federal Open Market Committee abandoned the use of the key word “elevated” to describe the US “core” inflation, the Fed’s preferred measure which strips out volatile food and energy costs.

But the FOMC emphasised that while core inflation measures “had improved modestly in recent months”, this was not sufficient to assuage its concerns. “A sustained moderation in inflation pressures has yet to be convincingly demonstrated,” it said. “The committee’s predominant policy concern remains that risk that inflation will fail to moderate as expected.” It added that tight economic conditions fostered by still moderate growth in the first half of the year were helping to keep inflation risks alive.

The hawkish stance from the Fed came despite revised official figures which confirmed that the US economy grew at a meagre annual rate of just 0.7 per cent in the first quarter — the slowest pace in more than four years.

However, the FOMC will have been concerned that a crucial GDP-based inflation gauge closely tracked by Fed officials showed that core US consumer prices rose at faster than previously estimated annual rate of 2.4 per cent in the first quarter, up from a more muted 1.8 per cent pace in the previous three months.

In the wake of the Fed’s statement, the dollar held its ground while shares and bonds on Wall Street slipped as markets traders’ and investors’ hopes of lower interest were further undermined. The Dow Jones industrial average erased earlier gains to close down 5.40 points at 13, 422.30.

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