Fed Holds Rates at 2%

Updated from 3:09 p.m. EDT

The Federal Reserve made no change to its key interest rate target Wednesday, electing not to combat rising signs of inflation as the U.S. economy and financial system remain fragile in the midst of the housing and credit crunch.

As expected, the central bankers left the federal funds rate target at 2%, having lowered it by 325 basis points since last fall in hopes of stimulating a slowing economy and cushioning the effects of financial turmoil on Wall Street. The Dow Jones Industrial Average received a modest boost from the decision.

While the Fed took no action to combat inflation, it did sound a more hawkish note in its policy statement, suggesting that rate increases could be in the works later this year unless the economy deteriorates further.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the Fed said in its statement.

Still, the Fed reiterated its forecast that inflation will abate.

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"The committee expects inflation to moderate later this year and next year," the statement said. "However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."

Peter Schiff, president of Euro Pacific Capital, says the Fed's inflation stance is probably all talk.

"In truth, [Fed Chairman Ben Bernanke] simply wants to preserve the expectation that he will act, even if it is the last thing on his mind," says Schiff.