The central bank's policy-setting Federal Open Market Committee voted to keep the federal funds rate target at 5.25 percent, pausing a cycle that had taken the rate steadily higher in 17 successive hikes since mid-2004.
Richmond Fed President Jeffrey Lacker voted against the move. The Fed provided no explanation for his dissent. Recent economic indicators have pointed to a downshift in the economy, led by a cooling housing market, but wages and prices continue to rise and the Fed suggested it could resume lifting borrowing costs if inflation proves tenacious.
"Inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand," the Fed said in a statement issued after the meeting.
"Nonetheless, the committee judges that some inflation risks remain," the central bank added, saying any further rate moves would depend on the outlook for prices and growth.
As the Fed meeting began, the government reported that growth in second-quarter productivity, or hourly output per worker, slowed to a 1.1 percent annual rate from 4.3 percent in the first quarter.
The key reason was a 4.2 percent jump in unit labour costs, the fastest since the end of 2004 and well above the first quarter's 2.5 percent - a reminder of inflation's durability despite a moderating expansion.
At the conclusion of its last meeting on June 29, the Fed cited steady productivity gains as having helped in curbing inflation expectations, a conclusion that may come into question as a result of the softer second-quarter productivity performance.
Soaring gasoline costs and oil prices that topped $77 a barrel earlier this week are causing anxiety among consumers forced to dig deeper to fill their gas tanks.
In recent speeches, Fed officials have cited softening data and stressed the full impact of prior increases in overnight interest rates had yet to be felt.
They have also expressed hope that slowing growth might dampen upward price pressures.
"A sustainable, non-inflationary expansion is likely to involve a modest reduction in the growth of economic activity from rapid pace of the past three years," Fed Chairman Ben Bernanke told Congress last month in semi-annual testimony on the state of the economy.
In the second quarter, the economy grew at an annual clip of 2.5 percent, much slower than the brisk 5.6 percent pace in the first three months of the year.
Friday's employment report showed only 113,000 jobs were created in July, down from 124,000 in June and well below the first quarter's monthly average 176,000. In addition, the previously soaring housing sector has lost altitude as would-be buyers face stiffer financing costs and builders reduce groundbreaking in response to weakening sales.
Despite signs the expansion is losing steam, consumer prices have kept rising.
The Fed's preferred inflation gauge, the core personal consumption expenditures price index, which excludes food and energy, rose 2.4 percent in the year through June - well ahead of the pace perceived to be the Fed's comfort zone.