The U.S. Federal Open Market Committee today voted 10-1 to hold the target federal funds rate for interbank lending unchanged at 2% for a second-straight meeting.

The Fed had lowered the rate 3.25 percentage points between September and April to limit the fallout from the housing and credit crunch.

The discount rate also remains unchanged at 2.25% for direct loans to banks.

“Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee,” the Fed said in its accompanying statement.

“Labor markets have softened further and financial markets remain under considerable stress,” the Fed said.

Today’s meeting was the first for new Fed Governor Elizabeth Duke, who was sworn in earlier today.

Bay Street economists offered mixed opinions on the Fed’s policy statement.

“On the growth side, the Fed reiterated that downside risks remain but that the substantial easing in monetary policy so far combined with the other measures to foster liquidity should help promote moderate growth going forward. On the inflation front, while recognizing that inflation has been high, the FOMC no longer qualifies the upside risks to inflation as increasing (though they acknowledge that there is still a large degree of uncertainty),” National Bank Financial says.

RBC Economics notes that the upside risks to inflation were emphasized as being of “significant concern” compared to the June statement in which the inflation risks were deemed only to be increasing.

“There was a more material shift in tone on the subject of economic growth compared to the June statement when the Fed indicated some diminution of the downward growth pressures, although this view was later reversed in the Fed’s Congressional testimony in July,” RBC adds.

RBC points out that the upward pressure on inflation was attributed to earlier increases in commodity prices, and the Fed noted that inflationary expectations are elevated. “However, the central bank’s forecast is that these pressures will not persist and that inflation will moderate later this year and in 2009 in the face of weakening growth,” it says.

Finally, RBC points out that, “The Fed once again made mention of the ‘substantial easing of monetary policy’ to date, which is often a signal that any further interest rates cuts are not in the offing. However, there was the usual caveat that incoming data will be monitored closely and will be responded to as needed.” Once again, Dallas President Fisher dissented in favour of a rate hike.

NBF concludes that today’s statement is more balanced than that of the previous release in June. “In light of the ongoing significant correction in commodity prices, we believe that the FOMC did the right thing by slightly tweaking its statement away from growing inflation concerns. In our view, the fact that core CPI, core PCE and wage inflation remain relatively stable while energy prices are finally beginning to correct materially vindicates the Fed’s decision to keep its target rate at the current level for the time being.”

“In our opinion, there is significant more downside risks to energy prices in the coming months (oil in particular) as commodities fall victim to weakening economic growth in a number of regions. Under these circumstances, we still think that the focus of many central banks will shift away from inflation fears,” NBF adds. “From the standpoint of the FOMC, given the amount of stimulus already in the pipeline (both monetary and fiscal), this shift will translate in the central bank keeping rates at current level through mid-2009 until the labour market stabilizes.”

In other U.S. economic news, the service sector contracted in July as new orders decreased and prices rose.

The Institute for Supply Management said today its reading of the service sector was 49.5 in July, up from 48.2 in June.

Wall Street economists had predicted a reading of 49.0.

A reading below 50 signals contraction, while a reading above 50 indicates growth.