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Fed Leaves Key Interest Rate Unchanged

The Federal Reserve, faced with a strongly rebounding economy, left interest rates unchanged on Wednesday while repeating concerns about 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.

That decision had been widely expected given an economy that is exhibiting better-than-expected growth. While the Fed had been expected to start cutting rates later this year, economists are now worried that the central bank may feel the need to resume raising rates for fear that inflation pressures will not keep easing.

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 favor 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.

While the Fed had been widely expected to leave rates unchanged for a fifth straight meeting, there are growing concerns its next move could be to raise rates, given a string of indicators showing stronger-than-expected growth.

On Wednesday before the Fed announcement, the government reported that the economy grew at a solid annual rate of 3.5 percent in the final three months of 2006 as strong consumer spending and an improving trade picture offset severe slowdowns in housing and auto production.

In a brief statement explaining its actions, the Fed said, "Recent indicators have suggested somewhat firmer economic growth and some tentative signs of stabilization have appeared in the housing market."

The statement also said that "reading on core inflation have improved modestly in recent months and inflation pressures seem likely to moderate over time."

However, Fed Chairman Ben Bernanke and his colleagues followed up that comment by repeating its belief that the panel "judges that some inflation risks remain." It said that the extent of any future rate hikes will depend on how the prospects for inflation and economic growth evolve in coming months, repeating the language it has been using at previous meetings.

Since the Fed's last meeting Dec. 12, the economic news has been uniformly good, with job growth stronger than expected, energy prices dropping and the overall economy navigating the rough waters of a severe housing slump.

Many analysts have gone from forecasting that the Fed would cut rates possibly three times this year to thinking that the most likely outcome is that the Fed will leave rates steady for a considerable period. And some are worried that there could be rate hikes in the second half of the year if inflation does not slow further.

The Fed last changed rates back in June when it pushed the federal funds rate, the interest that banks charge each other, up to 5.25 percent.

It marked the 17th consecutive meeting that the central bank had nudged rates up by a quarter-point. Before the Fed started raising rates in June 2004, the funds rate was at 1 percent and the prime rate stood at 4 percent, both the lowest levels in more than four decades.

The Fed is hoping to engineer a "soft landing" in which the economy slows and inflation pressures are lowered but the slackening of business activity doesn't spell recession.