Fed's Not Forgetting Inflation

While the pace of consumer spending declined in the quarter, "wages and salaries increased solidly and household sentiment appeared supportive of further gains in spending," the Fed said.

Overall inflation did pull back in June thanks to a drop in energy prices, and the core personal consumption expenditure price index, closely watched by the Fed, climbed a little less than its average for the past year.

Regarding the economic situation and outlook, the participants at the meeting said they continued to view "moderate economic expansion in coming quarters" as the most likely outcome "but that the downside risks to growth had increased." Inflation should slow going forward, they said.

Even so, the central bankers worried that high levels of resource utilization and slower productivity growth "could augment inflation pressures. Against this backdrop, the [Federal Open Market Committee] agreed that the risk that inflation would fail to moderate as expected remained its predominant policy concern."

The FOMC, the Fed's policymaking arm, left the fed funds target rate at 5.25%, where it has been since June 2006. The fed funds rate is what banks charge each other for overnight loans.

Fed members did express concern that the housing slowdown would continue to hinder growth, representing a significant risk to the economy. The strains in the financial markets were also a threat, the Fed said.

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