WASHINGTON (AP) – The Federal Reserve left a key interest rate unchanged on Wednesday, as falling energy prices have helped to restrain inflation pressures.

Federal Reserve Chairman Ben Bernanke and his colleagues issued a brief announcement saying they would leave the federal funds rate, the interest that banks charge each other, at 5.25 percent.

The decision represents a break for borrowers. It means that banks’ prime lending rate, the benchmark for millions of consumer and business loans, will remain at 8.25 percent.

The Fed also had left rates unchanged at their last meeting in August, breaking a record string of 17 rates hikes that had driven the funds rate to its highest level in more than five years.

The Fed’s reasons for leaving rates alone were nearly identical to the ones it gave in August. Analysts said the Fed may decide to keep rates unchanged for the rest of this year and well into 2007 in response to lower inflation pressures and an economic slowdown stemming in part from a cooling housing market.

“With the lower inflation numbers and the weaker housing data, the odds have shifted towards the Fed doing nothing for the rest of the year,” said David Wyss, chief economist at Standard & Poor’s in New York. Mr. Wyss said the next Fed move would likely be a rate cut sometime next year.

Wall Street took the Fed announcement in stride. The Dow Jones industrial average was up 49 points in late afternoon trading.

The decision to leave rates alone had been widely expected, given recent favorable developments on inflation. Oil prices have fallen by more than 20 percent over the past two months and a cooling housing market has contributed to a slowdown in overall growth.

The Fed is trying to engineer a soft-landing for the economy in which growth is slowed enough to keep inflation from getting out of hand without overdoing the credit tightening and raising the chances of a recession.

In its statement, the Fed continued to signal concerns about inflation, repeating a phrase it had used last time – that the Fed’s rate setting panel “judges that some inflation risks remain.”

The Fed also said – as it had last time – that “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, as implied by incoming information.”

The Fed took note of the slowdown that has occurred in the economy, saying that “economic growth has moderated from its quite strong pace earlier this year” which it attributed to the cooling housing market and the impact of previous Fed rate hikes and higher energy prices.

The funds rate was at a 46-year low of 1 percent and the prime rate stood at 4 percent back in June 2004 when the Fed began a two-year credit campaign to raise rates. The Fed boosted rates a record 17 consecutive times before deciding to pause at the last meeting on Aug. 8.

The decision to keep rates unchanged Wednesday was supported by a 10-1 vote with Jeffrey Lacker, president of the Fed’s Richmond regional bank, again casting the lone no vote. Lacker, who also dissented in August, argued again that another quarter-point rate hike was needed to keep inflation in check.

Analysts are split on whether the current pause will be indefinite or whether at least one more rate increase will occur before the end of the year.

While global oil prices have fallen significantly from their highs above $77 per barrel, there are still worries about inflation pressures coming from wage increases outstripping productivity gains.

Economists who believe the Fed is finished raising rates point to the drop in energy prices as a major factor that will help slow price pressures going forward. That development is already showing up in slower increases in consumer and wholesale inflation based on recent government reports.

Also helping to lower inflation pressures has been a big slowdown in housing following a five-year boom in which home sales soared to record highs, powered by the lowest mortgage rates in four decades.

That situation has reversed this year, with sales of both new and existing homes falling. And the government reported Tuesday that construction of new homes and apartments plunged in August to the slowest pace in more than three years.

Whatever happens, analysts are not looking for interest rates to go up much from where they are now unless inflation gets out of hand and the Fed starts aggressively raising rates again.

Mortgage rates actually have been falling in recent weeks, with the 30-year mortgage rate down to 6.43 percent in the latest Freddie Mac survey, compared with a high this year of 6.8 percent reached in late July.

___

On the Net:

Federal Reserve: http://www.federalreserve.gov