Inflation-Wary Fed Leaves Rate Alone

Central Bank Unsure Whether Core Reduction Reflects True Price Trend

Inflation may be lower, but it hasn't dropped enough for the Fed.

That was the message yesterday from Federal Reserve policymakers who left a key short-term interest rate unchanged but issued a statement highlighting their continuing concern about price increases.

The Fed's tough stance on inflation disappointed some investors who had hoped the central bank might signal it was satisfied with declining inflation and would consider cutting interest rates soon.

Such hopes had been fueled by a recent ebb in the Fed's preferred gauge of core inflation, which excludes food and energy prices.

"Readings on core inflation have improved modestly in recent months," the central bank's top policymaking committee acknowledged in a statement released after its two-day meeting.

But the group stressed that it is unsure whether overall inflation is coming down as well, saying, "However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated."

Moreover, the group said, inflation pressures may stay strong because unemployment is low and busy factories are using much of their productive capacity.

In their statement yesterday, the committee members "didn't officially tweak their benchmark, but they did let financial markets know there are other inflation gauges out there" beyond the index the Fed has long preferred to track core inflation, said Richard Yamarone, director of economic research for Argus Research. "And the other ones are creeping higher and are of great distress to consumers."

The Fed still forecasts inflation to fall over time. But, the statement said, the committee's "predominant policy concern remains the risk that inflation will fail to moderate as expected."

"The tone is tough love," said Stuart G. Hoffman, chief economist at PNC Financial Services Group. Although core inflation has fallen, "implicit in what they say here is they are still concerned" that businesses may raise prices to cover rising food and energy costs, he said.

Several Fed policymakers, including Chairman Ben S. Bernanke, have said they would prefer to keep core inflation in the range of 1 to 2 percent a year.

Consumer prices, measured by the Commerce Department's core-inflation measure, rose 2 percent in the year that ended in April, down from 2.1 percent in March.