The US Federal Reserve's Open Markets Committee declined to touch interest rates at the end of its two day summer meeting in Washington which ended early Friday morning, Australian time.
The committee met against a backdrop of edgy financial markets and investors developing a nasty case of risk aversion.
In a development the Fed stressed in new language that inflation is the greatest risk facing the economy.
"Readings on core inflation have improved modestly in recent months,'' the Federal Open Market Committee said today after a two-day meeting in Washington. "However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated.''
By playing down the recent slowing of inflation, the Fed dashed hopes of some that it would prepare the ground for a rate cut later this year.
"The committee's predominant policy concern remains the risk that inflation will fail to moderate as expected,'' The economy is "likely to continue to expand at a moderate pace over coming quarters.''
Clearly the Fed remains to be convinced that inflation is going to continue easing, but it believes the slow growth in the economy and especially the sluggish building sector will help keep prices rises in check.
There was no mention of the recent emergence of pressures in highly leveraged markets.
That has seen US Government bond yields fall sharply as many investors have sought the refuge of the biggest financial market in the world, abandoning shares, junk bonds, currencies: anything where there is perceived risk.
At the same time the subprime mortgage crisis and the slowdown in housing activity in both the new and used home markets, are dragging on the wider economy.
Figures out overnight confirm the slowdown in first quarter growth in the US economy. The economy grew at an annual 0.7 per cent rate in the three months to March.
The latest estimate compares with the 0.6 per cent rate released last month and a 2.5 per cent annual rate in the last three months of 2006
Several other reports this week suggest the economy may be slowing again; that there is worse to come for housing, and consumers are starting to get worried, according to another report.
Lenders are reining back on home loans, insisting that potential borrowers have much higher credit records and are better quality credit risks.
The move by investment bank, Bear Stearns to bail out one of two hedge funds that invested in these derivatives (called Collaterised Debt Obligations, or CDOs), was the catalyst of the latest burst of nervousness.
But it had its genesis in the sharp rise in bond yields from May which shook markets: from shares, to bonds, to commodities and the more esoteric over the counter dealings.
Bear Stearns originally put up $US3.2 billion, since halved to bail out one fund and now says the second fund would not be bailed out but would be rundown to minimise losses.
Junk bond yields have started rising, widening the spread between these non-rated securities and US Treasury yields.
By some reckonings that spread is up from less than 2.5 percentage points, to more than 2.80 percentage points at the start of this week.
It means the long trend downwards in this spread, which allowed hundreds of billions of dollars worth of deals to be financed more cheaply than they would have been, is over and private equity buyouts and the like are going to cost more and yield less to investors in hedge and equity firms.
That penny has dropped with the value of units in the Blackstone Group, the big private equity fund which listed last Friday and saw its price run up to $US38, only to see it fall below the $US31 issue price on worries that private equity deals will not be as attractive, or profitable for a while.
Several multi-billion dollar bond issues or buyout deals are in the balance, with several being delayed or pulled because of the unsettled markets and the rise in the interest rate spreads
Its against this background that the Fed met and left rates on hold.
Tuesday saw reports from The Conference Board, whose index of consumer confidence fell to 103.9 in June from a revised 108.5 in May.
The US Commerce Department said purchases of new homes fell 1.6 per cent in May, to an annual pace of 915,000.
And housing prices in 20 American cities in April suffered their biggest fall in six years, according to a survey from Standard &Poor's/Case-Shiller.
In another sign of trouble for the housing and home building markets America's leading home builder, Lennar, reported an unexpected loss in its second quarter and warned of more losses and possibly tougher times ahead.
The company's statement talked of worse than expected weakness in the housing market, which it said made it impossible to give specific guidance going forward."The housing market has continued to deteriorate throughout the second quarter," CEO Stuart Miller said in the company's quarterly report.
"The supply of new and existing homes has continued to increase resulting in declining home prices across our markets. As we look to our third quarter and the remainder of 2007, we continue to see weak, and perhaps deteriorating, market conditions."
KB Home, the fifth largest U.S. homebuilder joined Lennar in reporting an unexpected loss.
The net loss for the three months ended May 31 was $US148.7 million, compared with a net profit of $US205.4 million, in the same quarter of 2006. Revenue fell 36 per cent to $1.41 billion.
The Conference Board's measure of present conditions fell to 127.9 from 136.1 and its gauge of expectations for the next six months dropped to 87.9 from 90.1.
Economists are now talking about the housing slump (the worst since 1991) slowing the US economy for the rest o
