The Fed said that "longer-term inflation expectations were well contained" and said that higher oil costs had not yet fed through into core inflation.
Nevertheless, the bank did note that "pressures on inflation have picked up in recent months and pricing power is more evident". It also described the pace of growth as "solid" rather than "moderate". The Fed also noted that the balanced risks assessment to both growth and inflation was contingent on "appropriate monetary policy action".
The dollar jumped higher against sterling and the euro after the announcement, along with Treasury yields.
The yield on the benchmark 10-year note shot up to 4.59pc from 4.48pc just before the announcement, while the Dow Jones Industrial Average was 50 points lower at 10515.
Most analysts believe the neutral level of US interest rates is about 4pc. Bear Stearns is predicting rates of 4.5pc by the end of 2005, a level which would require a 50 basis point rise at some point during the year.
The Fed's unanimous decision came after data released earlier in the day showed US producer prices rising. Wholesale prices rose 0.4pc in February, while the core producer price index rose 0.1pc.
In the UK, inflation measured by the official Consumer Price Index remained at 1.6pc in February, defying expectations of a rise. Faltering consumer demand meant retailers were unable to raise shop prices after the New Year sales by as much as in previous years.
