updated 7/19/2007 2:48:27 PM ET 2007-07-19T18:48:27

Continuing concerns about inflation underpin the Federal Reserve’s stand against changes in interest rates.

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That line of thinking prevailed as the policymakers decided to hold the rates steady last month despite a competing concern that the housing slump might short-circuit the economic expansion.

Anguish over inflation held sway at the June 27 meeting of monetary policymakers — as it has at previous sessions — according to minutes of the closed-door June 27-28 deliberations, released Thursday. This record shows that their “predominate concern” continued to be whether inflation would fail to recede as anticipated.

Fed Chairman Ben Bernanke and his central bank colleagues noted there have been some improvements on underlying inflation readings but this was “not seen as convincing evidence that the recent moderation of core inflation would be sustained,” according to the Fed minutes. Core, or underlying, inflation excludes volatile energy and food prices, and is closely monitored by the Fed.

“Participants were wary of drawing any firm conclusions about future trends from a few monthly readings that could reflect transitory influences and remained concerned about forces that could contribute to inflation pressures,” the minutes said.

High food and energy prices, meanwhile, have boosted the overall inflation rate, making Fed officials wonder whether that would affect the mindsets of consumers, businesses and investors, which in turn could make them act in ways that could aggravate inflation. Some policymakers said that posed “some risk of a deterioration in inflation’s expectations.”

Fed members continued to believe that the economy would make its way safely through the housing slump.

After five-boom years, the housing market went bust last year, causing a major drag on overall economic activity.

The economy barely budged in the first three months of this year, growing at a pace of just 0.7 percent, the slowest in more than four years. Fed policymakers, however, were hopeful a rebound would take place.

“Although the housing market remained a key source of uncertainty about the outlook, Fed members thought it most likely that the overall economy would expand at a moderate pace over coming quarters,” the minutes said.

Against this backdrop, these policymakers felt comfortable leaving a key interest rate at 5.25 percent, where it has stood for just over a year. Many economists believe the Fed will leave rates where they are for the rest of this year.

Even with Fed policymakers predicting the economy would continue to grow gradually over the coming quarters, fallout from the sour housing market will still be felt, they said.

“Housing activity was seen as likely to continue to contract for several more months,” the Fed minutes said. Rising interest rates could dampen housing demand, the officials said. The possibility that mortgage lenders’ ability to make fresh loans could be crimped because of rising delinquencies and related problems in the market for higher risk, or subprime, mortgages, also could dampen demand for housing, some said. Subprime mortgages are made to people with spotty credit records.

Fed policymakers at the June meeting continued to explore ways to improve their communications with Wall Street and Main Street. The Fed officials are examining the statements released after each of their eight meetings a year to discuss interest rate policy, minutes of their meetings and their twice-a-year economic projections, the minutes said. No decisions were made about any possible changes.

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