The US Federal Reserve kept interest rates on hold at 1.25 per cent yesterday, but signalled great uncertainty about the US economy.

The decision, ahead of an imminent war with Iraq, had been predicted by most economists and analysts and priced in by investors.

But, despite a more confident tone in oil and financial markets in recent days, the Fed's open market committee (FOMC) yesterday indicated clearly it was standing ready to cut rates immediately if the economic outlook deteriorated suddenly.

In a statement released with an unanimous decision, the Fed said that it would practise "heightened surveillance" of the economy, similar to language used in the past ahead of an interest rate move between scheduled meetings.

In a highly unusual move, the Fed said it could not tell whether the risks to the economy were balanced or skewed one way or the other.

Economists had predicted that the recovery in financial markets, together with the prospect of a quick war, would keep the Fed on hold. - (Financial Times Service)