THIS was the most anxiously awaited decision by the Federal Reserve for years.

Before last night’s big event, some analysts and investors feared that the real inflationary threat from soaring energy costs, and markets’ anxieties that the Fed might have gone soft under its new Chairman, Ben Bernanke, would tempt it into an aggressive half-point rise in US interest rates.

On a fretful Wall Street, others were wringing their hands, worried that the Fed’s policymakers would compound the uncertainty that has fuelled market turbulence since May 10.

In the event, however, the Fed’s Open Market Committee seems to have pleased almost everyone.

Its carefully balanced statement last night simultaneously eased investors’ concern that the Fed has grown too relaxed over the risks of accelerating inflation, while laying weight on the impact of an expected slowdown in previously robust US growth in helping to quell upward pressure on prices.

The FOMC fulfilled market expectations when it ordered a seventeenth consecutive rise in its key Fed Funds rate, by a quarter point, to 5.25 per cent. But it confounded speculation among some economists and strategists that it might opt for the more aggressive course of a half-point rise.

Instead, the Fed’s unanimous verdict boosted hopes that an end to the present cycle of US rate rises may at last be in sight, triggering a steep rally in US blue-chip shares and Treasury bonds.

The Fed was careful to leave itself ample room for manoeuvre, making clear that it will not hesitate to push US borrowing costs still higher if that should prove necessary. But encouraging hopes that it will now hold its fire — at least for a time — it emphasised that its next moves would crucially depend on the latest figures for inflation, as well as growth and employment.

“The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information,” the FOMC said.

In a clear attempt to dampen financial markets’ nervousness that under the new chairmanship of Mr Bernanke it has become overly tolerant of inflation dangers, the FOMC emphasised its concerns that so-called “core” inflation in the US economy — after stripping out the volatile costs of energy and food — had stayed at “elevated” levels over recent months.

The committee said that although an expected slowing of US growth from the rapid pace recorded in the first quarter would help to tame these pressures, “some inflation risks remain”.

Last night markets appeared to have drawn the conclusion that the Fed’s latest, carefully coded signals pointed to at least some pause before any further rate increases — and perhaps that US rates could be at a peak.

Ian Shepherdson, of New York-based High Frequency Economics, said that it was now likely that markets have seen the last rate rise from the Fed in the present cycle. “There has been an outbreak of rationality at the Fed. Payrolls (employment figures) permitting, they’re done,” he said.

After weeks of markets turmoil, the Fed’s carefully coded message struck as soothing a note as investors could have wished. The big test for the central bank now is whether it can stick with this tune, or whether events will force it to switch to a more discordant tone.

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