Sept. 16 (Bloomberg) -- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for a cut after Lehman Brothers Holdings Inc.'s bankruptcy shook markets worldwide.

``Downside risks to growth and the upside risk to inflation are both of significant concern,'' the Federal Open Market Committee said in a statement in Washington. ``The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.''

Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy skirting a recession.

``Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters,'' the statement said. ``Over time, the substantial easing of monetary policy combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.''

The decision was unanimous, the first such agreement in a year.

``The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain,'' the Fed said.

New York Fed President Timothy Geithner didn't come to Washington today for the meeting, staying in New York, where talks continue at his bank on the crisis at American International Group Inc.

Futures Bets

Futures traders had put an 80-percent chance on at least a quarter-point rate cut. Three months ago, they saw a 100 percent chance of an increase.

The Fed held rates steady even after the Standard & Poor's 500 Index dropped 4.7 percent yesterday to the lowest level since October 2005. Rate cuts totaling 3.25 percentage points in the past year and emergency Fed loan programs have failed to revive lending among banks.

``We have a very concentrated problem in housing that's not really a rate problem, and we've got a financial crisis that's really not a rate problem,'' former Dallas Fed President Robert McTeer said in an interview with Bloomberg Radio before the decision. ``I don't think we have a generally weak economy that needs lower rates.''

Wall Street Upheaval

Bernanke and Treasury Secretary Henry Paulson refused to offer federal aid to Lehman after its stock plunged last week, pushing the 158-year-old company into bankruptcy early yesterday.

Merrill Lynch & Co. became engulfed by the turmoil, agreeing to a quick merger with Bank of America Corp. this week, while insurer AIG struggled to stave off collapse after its credit ratings were cut.

The rout sparked by the collapse of the U.S. subprime mortgage market has cost financial institutions worldwide $515 billion in writedowns and losses since the start of 2007. Firms have raised $362 billion of capital in response.

The New York Fed injected $70 billion of temporary reserves into the banking system today and $70 billion yesterday, the most since the September 2001 terrorist attacks. The central bank has also provided billions of dollars through direct loans of cash and Treasuries, and widened on Sept. 14 widened the collateral accepted for loans to securities firms to include equities.

Credit-Market Seizure

Still, banks are driving up short-term lending rates on concern AIG will follow Lehman into bankruptcy and leave financial institutions with losses on $441 billion of credit derivatives issued by the biggest U.S. insurer. Central banks around the world pumped more than $210 billion into the financial system as they sought to alleviate the credit-market seizure.

The cost of borrowing in dollars overnight more than doubled to the highest since 2001. The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The rate was as low as 2.07 percent in June.

Tumbling commodity prices, including a 38 percent decline in crude oil from a July 11 peak, ease pressure on the Fed to fight against inflation. The consumer price index fell 0.1 percent in August, the Labor Department said today. So-called core prices, which exclude food and energy, rose 0.2 percent after a 0.3 percent gain in July.

Impeding Growth

Lehman's bankruptcy filing came amid signs that losses at financial institutions are impeding U.S. economic growth.

The economy will slow to a 1.2 percent annual growth rate, or less than half the prior quarter's pace, as consumer spending, the biggest part of the economy, stalls this quarter, according to a Bloomberg survey from Sept. 2 to Sept. 9.

The decline in consumer spending prompted automakers last month to reduce car output by 12 percent, or the most in a decade, Fed figures showed yesterday. Industrial production in the U.S. fell by 1.1 percent, or the most in almost three years.

Unemployment rose to a five-year high of 6.1 percent in August and foreclosure filings rose to a record as falling home prices frustrated homeowners' efforts to sell or refinance their homes, RealtyTrac Inc. said.

``Downside risks to growth have risen significantly,'' Robert DiClemente, chief U.S. economist for Citigroup Global Markets said yesterday in a note to clients in which he predicted a half-point cut. ``Conditions remain hostile to a sustained restoration of economic growth.''

Lehman Fallout

Still, Fed officials may prefer to wait a little longer to see how the Lehman fallout affects the broader economy. Former Fed Governor Lyle Gramley compared Fed policy with its approach during the start of the credit crisis in August 2007, when the Fed waited a month to lower the federal funds rate.

Policy makers have ``tried to make a clear demarcation between setting the funds rate and providing liquidity ever since the beginning of the financial crisis,'' said Gramley, now senior economic adviser at Stanford Group Co. in Washington. He predicted the central bank wouldn't change the benchmark rate.

A rate cut would have indicated that Fed officials believe the ``turmoil is likely to continue and there may be much deeper repercussions,'' former St. Louis Fed President William Poole said yesterday in an interview with Bloomberg Television. ``The right position is, the market is taking care of this, as painful as that is.''

``It seems to me the risks are declining now as the weaker players are eliminated,'' Poole said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

Last Updated: September 16, 2008 14:14 EDT