The Federal Reserve left America’s interest rate at close to zero and indicated that there would be no increase for at least six months.

The US central bank said that economic activity had “continued to pick up” — a brighter assessment than it issued after its previous rates committee meeting in September, when it said that conditions were stabilising.

The Fed added that high unemployment and low inflation were “likely to warrant exceptionally low levels of the federal funds rate for an extended period”. There had been speculation last month that the Fed, which cut rates to a range of 0 per cent to 0.25 per cent last December, would step back from its September promise of low rates for an “extended period”, which economists have interpreted to mean at least six months but more likely a year.

Investors were carefully watching the wording of yesterday’s statement. The continued use of the term “extended period” indicates that the Fed believes the economic recovery remains fragile, raising questions about the sustainability of the present equity rally.

But a continuing low interest rate also undermines the dollar, driving investors to higher yielding assets, such as stocks and commodities.

After the Fed statement, the US Dollar Index, which measures the dollar against a basket of six main currencies, fell 0.9 per cent to 75.652 points. Meanwhile, the Dow Jones industrial average rose 0.31 per cent to 9,802.14 points and the S&P 500 was up 0.10 per cent to 1,046.50.

The minutes from the committee meeting will be released on November 25, throwing more light on the Fed’s thinking regarding the wording of its announcement. Mixed economic data released yesterday underlined the reasoning behind the Fed’s cautious stance. There were mildly positive messages on jobs and services but another report showed that the financial difficulties faced by many Americans had not eased.

The non-manufacturing index of the Institute of Supply Management (ISM) hit 50.6 points last month. Although down from 50.9 in September and below the 51.5 economists had expected, investors took comfort that any reading above 50 indicated growth. The ISM index is seen as a key sign of America’s health because it covers the service sector, which provides a greater proportion of US economic output than does manufacturing.

Brian Bethune, the chief US financial economist for IHS Global Insight, warned, however, that the 50-plus reading was not wholly good news because the sector’s growth was fuelled mainly by job cuts.

“It’s a short-term strategy,” he said. “It’s a question of how long you can go on cutting without impacting your longer-term growth.” Continuing job cuts will hit consumer spending, which is the biggest contributor to the country’s economic growth, Mr Bethune added.

The Fed said: “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.”

ADP, the payroll company, said that 203,000 private sector workers lost their jobs last month, down from 227,000 in September. Although the job cuts were worse than the 190,000 expected by economists, it was the seventh consecutive month of fewer job cuts. Investors hoped that the Labor Department would reveal the same pattern of slowing job losses in its employment report, which includes public sector workers, tomorrow.

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