The Federal Open Market Committee of the Federal Reserve on Wednesday opted to keep its target for the federal funds rate at 2%, sending Wall Street on another leg downward and signaling that inflation continues to weigh on the minds of the Fed governors.

Wall Street was hoping for an emergency rate cut in the wake of the failure of Lehman Brothers, the sale of Merrill Lynch to Bank of America and uncertainty surrounding AIG, the world's largest insurer. The Dow Jones Industrial Average, which was holding onto slight gains after yesterday's massive selloff, dropped as much as 100 points shortly after the Fed announcement but recovered to a gain of more than 100 points shortly before 3 p.m.

In its statement, the FOMC said, "Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. 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."

However, that scenario was not enough to prod the Fed to cut rates. "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth," the FOMC said. "Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain."

The statement concluded, "The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee."

The Fed earlier in the day pumped $70 billion in the financial system. Wall Street took the Fed's rate stance as evidence that it is willing to use the various tools other than its benchmark interest rates to help stabilize financial markets. The Fed statement gave no indication of whether a rate cut in the future is on the table.

The FOMC left its discount rate, the rate it charges banks and brokerage houses for short term loans, at 2.25%.