The Federal Reserve yesterday held benchmark US interest rates steady and said that while tightening credit conditions had increased downside risks facing the economy, inflation was still its main concern.

The decision by the central bank's Federal Open Market Committee kept the overnight federal funds rate at 5.25 per cent, the level it hit in June 2006 after 17 consecutive quarter-percentage point increases.

The decision comes against a backdrop of volatile financial markets and rising default rates in the US subprime mortgage market. Even after a big rebound on Monday, stocks indexes are well below highs notched in mid-July.

The Fed took note of the turbulence, but said it believed the economy was sound.

"Although the downside risks to growth have increased somewhat, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected," the central bank said in a statement.

"Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing," it said. "Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters."

Prices for US government bonds and stocks slipped, while the dollar held steady.

As markets worry about exposure to subprime loans, credit conditions have tightened for borrowers, raising the possibility of slower spending.