As expected, the U.S. Federal Open Market Committee decided today to keep its target for the federal funds rate at 5.25%, and kept its tightening bias in place.

In its accompanying policy statement the Fed said, “Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.”

Bay StreeteEconomists are trying to figure out when the Fed may start cutting rates.

Despite the fact that it was fully expected, today’s rate decision was not unanimous, with Jeffrey Lacker again voting for an increase of 25 basis points. “The Fed recognizes that growth has slowed, but it remains confident that the slowdown will prove to be temporary,” National Bank Financial explains. “Under these circumstances, the central bank remains concerned with the high level of resource utilization (a tight labour market combined with the recent downward revision to their estimates of potential GDP growth) which may yet still threaten the inflation backdrop despite the recent drop in oil prices.”

“Accordingly, a change of bias by inflation hawks will require hard evidence that inflation is ebbing from its high level or that the economic slowdown will be more acute than is currently forecast by the Fed,” it adds.

Bank of Montreal says that with policymakers continuing to believe that some inflation risks remain, the Fed is unlikely to cut rates at the next meeting on December 12 even if the economy remains soft. “Indeed, some easing in core inflation is likely required to spur a rate cut,” BMO says. “While we still expect the Fed to begin easing early in the New Year, the Fed’s continued concerns about inflation highlight the risk of a delay.”

“All told, there was little change to the Fed’s message, and there was certainly nothing to prompt the markets to believe that the Fed will do anything but remain on the sidelines for the foreseeable future,” TD says. “Still, we continue to believe that the Fed’s next move is going to be to cut interest rates – although that will not happen over the course of this year.”

“Will there be enough evidence to convince FOMC members to cut rates as early as January?” NBF asks. “Given the downward revision to Fed’s estimate of potential GDP growth, the odds, in our opinion, have shifted slightly against such an outcome.”

“We now think the Fed easing campaign will start later than we initially expected. However, given our U.S. economic scenario of sub-par growth well below potential for an extended period of time, we still expect large rate cuts in 2007,” NBF concludes.