The US Federal Reserve yesterday left short-term interest rates unchanged at 6.5 per cent but declared itself more worried about the risk of recession than inflation.

The Fed's policy-making open market committee signalled a likely end to an 18-month cycle of interest rate rises by suggesting its next move was more likely to be a cut.

The dollar edged lower against other key currencies after the decision. But the losses were moderated by market expectations that the Fed's decision would limit the risk of a "hard landing", or a recession, analysts said.

The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings and stress in some segments of the financial markets suggested that economic growth may be slowing further, the Fed said in its post-meeting statement.

There was some selling on stock markets following the expected announcement, with commentators predicting that the Fed would move on rates when its key committee meets again on January 30th. "While some inflation risks persist, they are diminished by the more moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased. The Committee will continue to monitor closely the evolving economic situation," Mr Alan Greenspan, Fed chairman, said in his statement.

Unlike the European Central Bank whose mandate is entirely devoted to controlling inflation, the Fed has to balance its priorities by sustaining growth too. The challenge is to take the economy from high to medium growth rates without overshooting in the face of mixed economic signals.

The danger is that holding rates steady for too long will push the economy into recession.