Feds hold line on interest rates

While acknowledging that "credit conditions have become tighter for some households and businesses" as financial markets react to upheaval in the mortgage lending industry, Federal Reserve officials aren't ready to slash the federal funds rate.

The Federal Reserve's Open Market Committee voted unanimously Tuesday to leave the key short-term rate at 5.25 percent, saying worries about inflation continue to trump the potential impact of the downturn in the housing market. A statement issued by the committee gave no indication that problems in mortgage lending have shaken that conviction.

The Fed's "predominant policy concern" remains the risk that inflation will fail to moderate as expected, the statement said. "Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information."

Although readings on core inflation have improved "modestly" in recent months, there's no convincing evidence of a sustained moderation in inflationary pressures, the statement said. High levels of resource utilization have the potential to sustain inflationary pressures.

"Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing," the committee said. "Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy."Many housing industry leaders are hoping the Fed will cut the federal funds rate -- the rate banks charge each other to lend money overnight -- to encourage borrowing. The committee will meet three more times this year, with the next meeting scheduled for Sept. 18.