Fed makes 'baby step' to rate cut

The Federal Reserve is sounding the alarm on inflation without committing to raise interest rates.

The Federal Open Market Committee left its benchmark rate at 2 percent on Wednesday (local time) and said "upside risks" to prices have picked up. The statement also said consumer spending is "firming", while acknowledging that rising energy prices will curb growth into 2009.

The FOMC cited "the elevated state" of some measures of inflation expectations and dropped an April forecast of a "leveling out" in commodity prices. The officials want to keep their options open on rate changes in case the credit crisis worsens and the economy deteriorates after consumers spend their tax rebates, Fed watchers said.