Fed keeps key target rate unchanged at 2.00% UPDATE

(Updates with more from FOMC statement)

WASHINGTON (Thomson Financial) - Federal Reserve Board Chairman Ben Bernanke and his colleagues voted today to keep the federal funds rate at 2.00% as expected, and warned that several factors are expected to keep US economic growth on a slow pace in the near term.

'Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters,' the Fed's policymaking Federal Open Market Committee (FOMC) said in its statement accompanying the decision.

The Fed indicated heightened worries about economic growth by dropping language from its previous statement that said downside risks to growth 'appear to have diminished somewhat.' Some analysts said this language was likely to be jettisoned in light of increased discount window lending, and recent market skittishness about mortgage giants Fannie Mae and Freddie Mac.

But the FOMC also indicated it is increasingly worried about inflation.

'Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated,' the statement said. While the Fed repeated that it sees inflation moderating this year and in 2009, it also added that 'the inflation outlook remains highly uncertain.'

The Fed's read on inflation comes after the price of oil has fallen about 20 pct over the last month, and the price of other commodities has dropped over the last few weeks.

Overall, the Fed held to its belief that its move to reduce the fed funds rate over the past year and boost market liquidity 'should help to promote moderate growth.' The FOMC statement also included the usual promises of close monitoring and willingness to act as needed to promote growth and price stability.

This is the second consecutive time the FOMC has left the fed funds rate -- the rate at which banks lend to each other -- at 2.0%, after seven prior rate cuts.

There was only one dissenter at today's meeting: Dallas Fed President Richard Fisher, an inflation hawk who again argued in favor of raising rates. A major question among analysts was whether another FOMC member would join Fisher, and said the addition of one or two other dissenters would have elevated the inflation rhetoric in the statement. [e-mail] pik/cbd/wash/rw COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.