The U.S. Federal Reserve decided Wednesday to hold a key interest rate steady at 2 percent in highlighting inflation risks.

WASHINGTON, June 25 (Xinhua) -- The U.S. Federal Reserve decided Wednesday to hold a key interest rate steady at 2 percent in highlighting inflation risks.

The Federal Open Market Committee, the Federal Reserve's decision-making body, said it expects inflation to moderate later this year and next year.

"However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high," said the central bank in a statement.

"Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending," the Fed said.

However, labor markets have softened further and financial markets remain under considerable stress, the Fed noted, adding tight credit conditions, the ongoing housing contraction, and the rise in energy prices "are likely to weigh on economic growth over the next few quarters."

The substantial easing of monetarypolicy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time, said the Fed.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the Fed warned.

"The committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability," it added.

The Fed decision on Wednesday had been expected by Wall Street. Many economists believe the Fed would prefer to leave rates steady through the rest of this year and then begin to boost them next year.