The Federal Reserve decided to hold US interest rates unchanged yesterday but suggested further rate rises might be needed to curb inflation.

In a statement accompanying the widely expected decision that followed a two-day meeting of the policy-setting Federal Open Market Committee, the Fed pointed to data suggesting economic growth was moderating towards a more sustainable pace.

And while underlying inflation had risen slightly, it said gains in productivity were continuing to contain price pressures.

But it said these signs of slowing growth were "still tentative and preliminary".

Referring to continued tightness in the jobs market, the Fed said the committee believed "the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future".

The Fed has raised rates by 1 percentage point since it began its current monetary tightening last year to put the benchmark federal funds rate at 6.5 per cent, its highest level in nine years.

In May, at the FOMC's previous meeting, the Fed lifted the funds rate, the interest rate at which prime banks lend to each other overnight in the New York money market, by a half percentage point, the first time it had made a move of that magnitude in more than five years.

But the decision to leave rates unchanged yesterday does pose some risks for the Fed. The FOMC's next regular meeting is not until August 22nd. By then, the US presidential election campaign will be well under way and interest rate increases then could see the Fed becoming embroiled in the campaign, as it was in 1992. Already some Democratic lawmakers have appealed to the Fed not to raise rates further.

A large majority of private sector economists had expected interest rates to be left unchanged yesterday. Only nine of 67 economists surveyed by the Bloomberg news services expected the Fed to raise rates.

Some in the minority argue that the scattered signs of an economic slowdown are far from convincing. Richard Yamarone, of Argus Research in New York, said jobs data for June were expected to show employment growth, while higher fuel prices would again place upward pressure on inflation for June.

Moreover, he said the long gap until the next meeting meant that not acting now was risky.