Fed Holds Rates Steady at 5.25 Percent, Drops Word 'Elevated' From Description of Core Inflation

The Federal Reserve left a key interest rate unchanged on Thursday, hoping that a year-long economic slowdown will cause inflation to retreat further.

Fed Chairman Ben Bernanke and his colleagues voted unanimously to keep the federal funds rate, the interest that banks charge each other, at 5.25 percent, where it has been for the past year.

Analysts believe that Fed officials could remain on hold through the rest of this year and well into 2008. Investor hopes that the weakening housing market could trigger rate cuts in coming months have faded as the economy has showed signs of a rebound.

The Fed decision means that banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain unchanged at 8.25 percent, where it has been for the past year.

In a brief statement explaining its actions, the Fed continued to say that its greatest concern was that the risk of inflation will not moderate as expected.

However, it expressed some optimism about recent developments on inflation, saying "Reading on core inflation have improved modestly in recent months."

But it said that a "sustained moderation in inflation pressures has yet to be convincingly demonstrated."

On economic growth, the central bank also sounded a positive note, saying, "The economy seems likley to continue to expand at a moderate pace over coming quarters."