The US central bank has kept the interbank overnight interest rate unchanged at 2 percent since April to help the economy recover from a deep housing market decline and sharp lending pullback.

By keeping the rate on hold, the Fed opted for the time being to soothe financial markets with central bank lending facilities rather than rate cuts, according to analysts.

Earlier yesterday, the Fed injected US$70 billion into financial markets, a move coming on the heels of similar actions by other central banks and another 70-billion-dollar move on Monday, to help increase liquidity and ease credit stresses amid turmoil following the bankruptcy of Lehman Brothers.

A statement issued by the Federal Reserve Bank of New York, one of the Fed's district bank which pumped the liquidity through open market operations, said the Fed "stands ready to arrange further operations later in the day, as needed."

The cash infusion yesterday was designed to help ease a spike in the overnight lending rate between banks. A sharp rise in such borrowing costs makes banks reluctant to lend to each other, worsening already tight credit conditions.

In another move, the Fed said on Sunday it would accept a wider range of collateral, including equities, from investment banks seeking central bank loans in an effort to help keep markets functioning.

Announcing the decision yesterday, the Fed noted in a statement that "strains in financial markets have increased significantly and labor markets have weakened further" since the last meeting in August.

But over the time, it said, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

That means the Fed was in the hopes that already low rates and expanded central bank lending will stabilize the economy.

"Economic growth appears to have slowed recently, partly reflecting a softening of household spending," the Fed assessed in the statement.

"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," it estimated.

On the inflation front, the Fed said that "inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities."

Policymakers expect inflation to moderate later this year and next year, but "the inflation outlook remains highly uncertain," it added.

"The downside risks to growth and the upside risks to inflation are both of significant concern," the Fed concluded, adding it will monitor economic and financial development carefully and act as needed to promote sustainable economic growth and price stability.

The Fed decision on Tuesday came one day after the 158-year-oldLehman Brothers filed for Chapter 11 bankruptcy protection from its creditors Monday and said it was trying to sell off key business units.

As the government refused to provide a financial backstop to potential buyers, Lehman Brothers's last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank.

In the fallout, Merrill Lynch, the third-largest U.S. investment bank, was forced to agree to be sold to Bank of America, and insurance giant AIG sought to raise cash to head off its own crisis.

There are possibilities that more financial institutions could follow these titans' suit, analysts believe, describing the situation as "a financial hurricane".

On Monday, investors suffered their worst losses since the terrorist attacks of 2001, and government officials raced to prevent the financial crisis from spreading.

U.S. Treasury Secretary Henry Paulson has vowed to take steps to maintain stability in financial markets.

"I am committed to working with regulators and policymakers -- including Congress -- to take necessary and appropriate steps to maintain the stability and orderliness of our financial markets," Paulson said in a statement issued Sunday night.

"And I will engage with regulators and policymakers around the world to that end," he said.