The Fed must balance inflation that is still above its comfort zone with the concerns of some officials that tighter credit will push up unemployment and reduce spending by consumers and businesses.
The rate left unchanged yesterday was the fed funds rate - what commercial banks charge one another on overnight loans.
But the decision meant commercial banks' prime interest rate - for certain credit cards, home equity lines of credit, and other loans - would stay at 8.25 percent.
"The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market," the policymakers said in a brief statement released after their meeting.
The Fed's goal is for the economy to slow enough to reduce pressures from inflation, but not so much that it would risk falling into recession. The wild cards are energy prices and the cooling in the housing market after a five-year boom.
After surging past $3 a gallon in many areas, gasoline prices are now hovering around $2.50 a gallon nationwide. Oil prices closed at a record $77.03 a barrel in mid-July, but now are below $61.
The risk of inflation's flaring up is still on the Fed's radar screen. But Fed policymakers say they believe inflation will calm down, and they cited the drop in energy prices as a reason for optimism.
The Fed's rate-raising campaign, halted Aug. 8, was the longest series of increases in Fed history.
The decision yesterday gives borrowers more time to catch their breath after all those increases, and savers a chance to lock in respectable rates.
Many economists think there is a good chance that the Fed again will stay on the sidelines at its next meeting, Oct. 24 and 25, and through the rest of this year.
"The Fed is on hold for the foreseeable future, expecting inflation to get better with a big assist from lower energy prices," predicted Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.
But the Fed did not foreclose the possibility of raising rates if there were signs inflation was breaking out.
"Some inflation risks remain," the Fed said. "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth."
For the second straight meeting, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., was the lone dissenter. As he did in August, he said he wanted the Fed to boost rates by one-quarter of a percentage point.
Ethan Harris, chief U.S. economist at Lehman Bros. Holdings Inc., does not think the Fed is finished with raising rates and predicts one more increase this year. "The core message of the Fed is watch and wait. Policymakers are not declaring victory," he said.
The economy is shifting from robust growth to more moderate activity - a 5.6 percent growth rate for the first three months of 2006, then 2.9 percent in the spring. A rate of 2.5 percent is predicted through the rest of this year.
The decline reflects the cooler housing market after five years of record sales. A sharper-than-expected slowdown could mean trouble for the economy.
The jobs climate now is decent, with unemployment dipping to 4.7 percent in August.
Also, there has been encouraging news on inflation: Consumer prices rose just 0.2 percent in August, half the increase in July.
Before the Fed began to raise rates in 2004, the prime rate was 4 percent, and its benchmark rate was 1 percent, a 46-year low. The Fed sliced rates to rescue the economy from the 2001 recession, the Sept. 11 attacks, and accounting scandals on Wall Street.
In the Federal Reserve's Words
From yesterday's Federal Open Market Committee statement on interest rates:
The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.
Inflation pressures seem likely to moderate over time.
Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming . . . to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.