The Federal Reserve held U.S. interest rates steady on Tuesday, expressing concerns about both economic growth and inflation and indicating it is in no rush to push borrowing costs higher.
The 10-1 decision by the U.S. central bank leaves the benchmark federal funds target at a low 2 percent, where it has been since April.
The Fed had reduced rates by a cumulative 3.25 percentage points since mid-September in response to a sharp housing retrenchment and turmoil in credit markets, and financial markets had widely expected no change Tuesday.
"Although downside risks to growth remain, the upside risks to inflation are also of significant concern," the Fed said in a statement outlining its decision.
The announcement closely mirrored a statement issued after the Fed's last meeting in late June.
However, it omitted a phrase from the June statement that had said risks to growth appeared "to have diminished somewhat." And while the Fed made clear its anxiety about inflation and inflation expectations, it dropped language from June saying those risks "have increased" -- a quiet nod to the sharp drop in oil prices in recent weeks.
U.S. stocks added to earlier gains, with the blue-chip Dow Jones industrial average ending up 332 points, or 2.9 percent.
U.S. short-term interest rate futures pared the implied prospects of rate hikes later this year.
Dallas Federal Reserve Bank President Richard Fisher was the lone dissenter, preferring higher rates to head off inflation.
It was Fisher's fifth straight dissent and the first time since 1981 that any official had voted against the majority so many times in a row.
"If there is a subtle shift in the (Fed's) risk assessment, it is that, while acknowledging the downside risks to growth, it notes the upside risks to inflation 'are also (of) significant concern,"' Marc Chandler, global head of strategy at Brown Brothers Harriman in New York, said in a note to clients.
"This may have been a sufficient bone to the hawks to prevent others from joining Fisher in dissenting," he said.
The Fed noted that growth in the second quarter had expanded due to consumer spending and strong exports.
U.S. gross domestic product grew at a 1.9 percent annual rate in the April-June quarter, but many economists expect it to decelerate in the second half of the year as spending spurred by economic stimulus checks peters out.
The economy's respectable, if somewhat subdued, April-June expansion followed a 0.2 percent contraction in the fourth quarter of last year and a tepid 0.9 percent gain at the start of 2008.
With the jobless rate at a four-year high and employers cutting jobs for a seventh straight month in July, many observers suggest it is a technicality to insist the economy is not in recession simply because a popular definition -- two consecutive quarters of contraction -- has not been met.
At the heart of U.S. economic malaise is a crumbling housing market that has not shown convincing signs of stabilizing.
The pace of existing home sales fell to the lowest level since 1998 in June and mortgage applications are at their lowest level since 2000 as buyers remain on the sidelines.
The Fed cautioned that tight credit, the housing slump, and high energy prices are likely to weigh on economic growth "over the next few quarters." Policy-makers said that the current low level of interest rates, as well as the temporary facilities the central bank has created to provide stressed financial markets with liquidity, should promote moderate economic growth over time.
A big change in economic conditions since the Fed's last meeting has been the decline in oil prices.
The cost of oil hit a record above $147 a barrel in July, but fell below $120 a barrel on Tuesday, hitting a three-month low.
The Fed said inflation has been high but acknowledged receding oil prices by saying inflation had been spurred by "earlier increases" in the prices of energy and some other commodities.
Fed officials have worried that big increases in energy and food prices could set in train an inflationary psychology in which workers and businesses push harder to cover their costs, leading to a broader pickup in prices.
A report on Monday showed inflation jumped 0.8 percent in June, the steepest rise since 1981.
The gain over the past year climbed to 4.1 percent, the most since 1991.
The Fed, in language mirroring its June statement, said it expects inflation to moderate later this year and next, but said the outlook for inflation is highly uncertain.