The Federal Open Market Committee, hoping to maintain a fragile balance between rising inflation and a stalling economy, left interest rates unchanged Tuesday.

Fed Chairman Ben Bernanke and his colleagues left the federal funds rate, the interest that banks charge each other, at 2% for the second meeting in a row.

Economists and market watchers were virtually unanimous in predicting the Fed’s decision not to act.

“We’re not expecting a whole lot of change at this meeting,” said Josh Feinman, chief economist with Deutsche Bank Advisors’.

Feinman, like other economists, said the FOMC members are essentially performing a balancing act, keeping one eye on “the downside risks to growth” and the other on inflation concerns.

“The greater risk is still to the downside in the growth,” said Feinman. “The inflation risks are receding, and that’s a big help.”

Many market forecasters believe the funds rate will remain at 2% for the rest of this year. That would mean commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, will remain at 5%, its lowest level since late 2004.

While the decision to leave rates alone was widely expected, economists were anxious to parse the Ded’s comments – known as the policy statement -- that explains their decisions.

Stuart Hoffman, PNC Financial’s chief economist, said he was “curious what they will say in the policy statement. I expect they will talk about the downside risks to the economy and that inflation risks remain elevated. The Fed is looking at both closely.”

Observers believe Tuesday’s policy statement could provide clues to the Fed’s strategy for the rest of this year and into ’09.

Responding to a severe credit crisis, the Fed last September launched an aggressive effort to cut interest rates. The committee reduced the funds rate seven times, lowering it from 5.25%, where it had been for more than a year, down to 2% in April.

At the Fed's last meeting on June 24-25, Fed officials chose not to cut rates again. Instead, they signaled growing concerns about inflation pressures that have been made worse this year by surging oil prices, which hit a record high at $147.27 per barrel on July 11.

Oil has since declined, but inflation concerns have not disappeared.

The inflation pressures have come while the economy has been staggered by a prolonged housing slump that has pushed home prices down by record amounts and a severe credit crisis that has seen banks tighten lending standards sharply after billions of dollars of losses on bad mortgage loans.

The Fed's problem is that its main policy tool, interest rates, can only address one problem at a time. The central bank cuts rates to spur economic activity and raises rates when it wants to battle inflation.

David Wyss, chief economist at Standard & Poor's in New York, told the Associated Press he believed a rebound in GDP growth, while perhaps only temporary, will take pressure off the Fed to cut rates again while recent declines in oil prices will help ease inflation worries.

"I don't see the Fed changing policy until next spring when I expect to see them start to raise rates," he said.

The central bank started Tuesday's meeting with a new member. Elizabeth Duke, formerly an officer at a Virginia-based community bank, was sworn in by Fed Chairman Ben Bernanke before the closed-door deliberations got under way.