Fed Keeps Rates Steady; Still Wary of Low Inflation

Federal Reserve (search) officials opted Tuesday to keep U.S. interest rates at 1958 lows and said they expected to hold rates down for a considerable period out of concern inflation could drift undesirably low.

Fed Chairman Alan Greenspan (search) and his Federal Open Market Committee (search) colleagues -- the group that sets interest rate policy in the United States -- said it had left the benchmark federal funds rate at 1 percent.

The funds rate, the interest that banks charge each other on overnight loans, is the Fed's primary tool for influencing the economy. It is at a 45-year low after the Fed cut rates 13 times since early 2001 in an effort to foster a vigorous expansion.

In announcing their decision, policy-makers repeated a warning they first issued in May over a small risk that already low-inflation could move down further, a risk they said would be their main concern for the foreseeable future.

Super-low short-term interest rates, along with President Bush's third round of tax cuts, have helped the economy shift into a higher gear during the summer, economists say. The next challenge is making sure the rebound is self-sustaining, they say.

The economy's recovery from the 2001 recession has seen a pattern of fits and starts, where a quarter of strength often has been followed by a quarter of weakness. That pattern could be broken, considering increasing signs that the economy finally has shaken its lethargy and is perking up, economists say.

Reuters and the Associated Press contributed to this report.