WASHINGTON (AP) — The Federal Reserve left interest rates unchanged yesterday but gave Wall Street a lift by expressing some relief at the prospects for inflation.The central bank voted to leave the federal funds rate, the interest that banks charge each other, at 5.25 percent, where it has been since last June.

The Fed continued to say it was more worried about the risk of inflation than weak growth, however, signalling that future interest rate hikes were still possible. But the Fed said recent developments on inflation have been favourable.

“Readings on core inflation have improved modestly in recent months and inflation pressures seem likely to moderate over time,” the Fed said in its new statement.

Financial markets, which had been growing increasingly worried that the Fed would hike rates in coming months in response to stronger-than-expected growth, posted a strong rally in response to the Fed’s comments.

The Dow Jones industrial average was up more than 100 points in the half-hour after the Fed’s announcement.

“This is as close to very good news for the markets as anyone could have asked for,” said David Jones, chief economist at DMJ Advisors, a Denver-based consulting firm.

Jones said he believed the Fed would keep interest rates unchanged through all of 2007. That would be a better outcome than recent fears that the Fed might resume raising interest rates because of worries that the stronger economy would not allow inflation pressures to subside.

The rate action was supported by a unanimous 11-0 vote of the Federal Open Market Committee, the panel of Fed board members in Washington and regional bank presidents who meet eight times a year to set interest rates.

At the previous four meetings, Jeffrey Lacker, the president of the Richmond Fed regional bank, had dissented in favour of a further boost in rates. However, he is not a voting member of the FOMC this year.

The action means that banks’ prime lending rate, the benchmark for millions of consumer and business loans, will remain unchanged at 8.25 percent.