Fed keeps rates steady, issues murky inflation comments

As expected, the Federal Open Market Committee kept interest rates unchanged at 5.25%. In the post-meeting statement (some of which is copied below), the Fed highlighted the fact core inflation has come down. But it said it wasn't yet convinced that inflation pressures have abated over the longer term.

Maybe that's a sop to the fact HEADLINE inflation has stayed stubbornly high. After all, a few news stories -- like this one from the Washington Post and this one from the FT -- have popped up recently. They point out (to anyone who's been living under a rock) that "volatile" food and energy prices have basically been volatile in only one direction for the past few years -- up. It seems ridiculous to continually pay attention only to core inflation in that case. Anyway, here's the key text from the Fed's statement:

"Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

"Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

"In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

The market reaction? A few swings here and there for stocks and bonds, but not much net progress so far. Two-year yields are up about 4 basis points, while 10-year yields are up about 1.3 basis points. Long bond futures were recently down about 4/32.