Federal Reserve Holds Rates at 2%

The Fed lowered its target by 325 basis points from September through April to ease the cost of lending and promote economic growth, but has held it steady since then. The rate target directly affects short-term loans between banks, but has a trickle-down effect on other consumer loans and thus affects prices and demand in the struggling housing market.

On the other hand, cheaper dollars can lead to higher costs for oil and other commodities, which are traded in dollars. Those costs translate into higher consumer prices, which rose 5% in June -- the highest level in more than 17 years -- due mostly to commodity prices. However, core inflation, which excludes food and energy costs, rose a more modest 2.4%.

The FOMC says it expects inflation to "moderate later this year and next year," but noted that the outlook "remains highly uncertain" and that upside risks are of "significant concern."

Despite those worries, rumblings of a possible rate-hike largely dissipated from the market after the FOMC's last meeting in late June. The committee held the rate steady saying it expected "inflation to moderate later this year and next year." Comments by Fed Chairman Ben Bernanke before Congress also seemed to indicate that the agency would hold off on rate movements until the economic picture was less muddied.

"Higher interest rates put downward pressure on home prices," says Lincoln Anderson, chief economist at LPL Financial. "Given the precarious place housing is in, they just don't want to mess with the housing sector right now -- they want to get a floor under home prices."