WASHINGTON (AP) – The Federal Reserve held interest rates steady yet again, noting the economy had slowed but saying growth would probably pick up in the months ahead.

With elections looming, Fed policymakers, wrapping up a two-day meeting on Wednesday, delivered a largely balanced message about economic conditions. Policymakers blended equal parts of caution about inflation risks with confidence that the economy’s nearly 5-year-old expansion isn’t in danger of petering out.

Against that backdrop, Fed Chairman Ben Bernanke and all but one of his central bank colleagues felt comfortable staying the course and kept an important interest rate at 5.25 percent for the third meeting in a row.

That meant commercial banks’ prime interest rate – for certain credit cards, home equity lines of credit and other loans – remained at 8.25 percent.

“Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market,” Fed policymakers observed. “Going forward, the economy seems likely to expand at a moderate pace,” they predicted.

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.

Terry Connelly, dean of Golden Gate University’s Ageno School of Business, said Fed policymakers are in a mode of “watchful waiting. … It’s like they have taken an economist’s version of the Hippocratic Oath: First do no harm.”

On Wall Street, the Fed’s message helped lift the Dow Jones industrials to a new record close. The index gained 6.8 points to finish at 12,134.68.

Economists believe the Fed will keep its finger on the interest rate pause button at its next meeting on Dec. 12, the last one this year, as well as into much of next year. Energy prices and the magnitude of the housing slump remain wild cards to that outlook.

Fed policymakers repeated their belief that “inflation pressures seem likely to moderate over time” due in part to falling prices for gasoline and other energy goods.

After topping $3 a gallon in the early summer, gas prices are now hovering around $2.23 a gallon nationwide, the Energy Department says. That, in turn, has helped calm consumer prices, which actually fell by 0.5 percent in September.

Still, Fed policymakers again made clear that they are keeping a close eye on the situation, saying “some inflation risks remain.”

And, they didn’t foreclose the possibility of raising rates if there were signs inflation was breaking out, saying, “The extent and timing of any additional firming that may be needed to address these risks will depend on the outlook for both inflation and economic growth.”

For the third meeting in a row, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., was the lone dissenter. As he did in the August and September meetings, Lacker said he would have preferred that the Fed boost interest rates by one-quarter percentage point.

To fend off inflation, the Fed since June 2004 has hoisted interest rates 17 times – each in quarter-point increments. The first halt in that campaign – which marked the longest series of increases in Fed history – occurred Aug. 8.

By continuing to hold interest rates steady, borrowers get more time to catch their breath and savers a chance to lock in some respectable rates.

A few economists still think the Fed may need to boost rates again. But others think the Fed’s next move probably will be a rate cut – perhaps sometime next year. The Fed’s mostly positive statement about the economy on Wednesday, however, did not suggest a rate cut would be on the table any time soon, analysts said.

Economists predict economic growth slowed to a 2.1 percent pace in the July-to-September quarter, weighed down by the housing slump. The government will release its first estimate of third quarter economic growth on Friday.

In fresh evidence of the housing cooldown, the National Association of Realtors reported Wednesday that sales of previously owned homes fell 1.9 percent in September. The median sales price of a single-family home, meanwhile, slid to $219,800 last month, a 2.5 percent drop from a year ago. That marked the biggest annual decline on record.

Analysts, however, are hoping for a bit of a rebound in overall economic activity in the October-to-December period, with growth clocking in close to a 3 percent pace.

Even with the slowing in economic growth, the job market remains decent. The unemployment rate fell to 4.6 percent in September.

“The Fed is trying to engineer a soft landing, and they are interpreting their recent actions as having succeeded to some extent in doing that,” said Victor Li, economics professor at Villanova School of Business.

—

On the Net:

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

AP-ES-10-25-06 1705EDT