The US Federal Reserve dug in its heels last night against any early cut in American interest rates, despite the past month’s global market turmoil.

The Fed’s policymaking Open Market Committee, after a two-day meeting, pegged official interest rates at 5.25 per cent for the ninth consecutive month and made clear that its key concern remains persistent inflationary pressures.

In a carefully couched statement designed to signal that it is alert to the threat from financial market upheavals, while striving not to rattle further edgy investors, the US central bank acknowledged that “markets have been more volatile in recent weeks”.

It also noted that “credit conditions have been tighter for some households and businesses”, as institutions have toughened lending criteria in reaction to the crisis in American sub-prime mortgage markets.

While the FOMC conceded that risks to America’s growth prospects “have increased somewhat” since its June meeting, it sought to reassure, reiterating its past view that: “The economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes, and a robust global economy.”

In a clear signal that it remains determined to resist market pressures for any early cut in US borrowing costs until it is satisfied that it has headed off any inflation threat, the Fed said that dealing with this risk remained its No 1 priority.

Although recent inflation figures had “improved modestly”, it said that “a sustained moderation . . . has yet to be convincingly demonstrated”. “The committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected,” it emphasised.

In recent data, the so-called “core” US consumer price inflation rate monitored by the Fed, which strips out volatile food and energy costs, eased to an annual pace of 2.2 per cent in June, down from a 2.9 per cent peak last September. Many Fed officials have made clear, however, that they are not yet ready to take it for granted that this easing in inflation will persist.

The Fed’s inflation concerns will not have been eased by data yesterday showing that unit labour costs, a key gauge of wage pressures, rose at a pacy 4.5 per cent in the 12 months to June. At the same time, revised figures showed that productivity, a key element in keeping inflation in check, grew by only 1 per cent last year — a downgrade from the previous estimated 1.6 per cent gain.

US blue-chip shares responded nervously as futures markets scaled back bets on an early cut in rates.

The Dow Jones industrial average first fell by more 70 points, before rebounding sharply into positive territory and later closing up 35.50 points at 13,504.30.

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