"Recent indicators have been mixed and the adjustment in the housing sector is ongoing," a statement from the Fed said.

 

"Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters."

 

Prices for US stocks and government bonds rose but the dollar fell as traders in financial markets predicted possible interest rate cuts later in the year.

 

"The committee's predominant policy concern remains the risk that inflation will fail to moderate as expected," the Fed statement said.

 

At its previous meeting in January, the central bank had said growth was looking "somewhat firmer".

 

Since then, however, a rise in mortgage defaults has raised concerns that it might become more difficult for households and businesses to borrow.

 

Little reassurance

 

There has been little to support the view that housing markets have stablised, as the Fed had said.

 

A report three weeks ago showed that sales of new homes fell almost 17 per cent in January, the largest slide in 13 years.

 

A sharp sell-off of US stocks last month added to worries that consumers, already suffering from stagnating home prices, may stop spending, putting an additional burden on the economy.

 

Despite evidence of weaker growth, there has been little reassurance that inflation was moderating as the central bank had hoped.

 

The 12-month change in the personal consumption expenditure price index, which is the inflation measure preferred by Fed policy-makers, moved up to 2.3 per cent in January from 2.2 per cent in December, one to two per cent above what many officials are comfortable with.