NEW YORK (AP) - The Federal Reserve's assessment that the economy is on the mend gave little comfort to the stock market and bond prices fell after the Fed noted rising prices for commodities.
The central bank's decision Wednesday to leave a key lending rate at a low of zero to 0.25 percent wasn't a surprise. Stocks pulled off their highs of the day to fluctuate in a narrow range.
In the economic assessment statement accompany its rate decision, the Fed said the economy's rate of decline appears to be slowing. It noted that consumer spending has shown further signs of stabilizing although job losses, shrinking wealth and tight credit remain problems. And while the Fed said economic activity is likely to remain weak for some time, it repeated its belief that stimulus policies will restore the economy to growth.
But the Fed's comments on inflation were unsettling. Policymakers noted that energy and other commodities prices have risen, although they said "substantial resource slack" would likely rein in cost pressures and that inflation "will remain subdued for some time."
The mention of higher prices hit the Treasury market because the value of returns on fixed-income investments can erode quickly if inflation occurs. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.69 percent from 3.63 percent Tuesday.
"I think a lot of people get misled by commodity prices as if that is the root of inflation," said Steve Darden, wealth adviser at Williams Financial Advisors in Shreveport, La. "Wages, benefits, people-related costs are two-thirds or more of finished good prices."
The Fed also didn't say it would increase its purchases of Treasurys or other kinds of government debt, disappointing some investors who had hoped for more. The Fed has said it would buy $1.25 trillion in mortgage-backed securities and $300 billion in Treasurys in an effort to stimulate the economy by keeping borrowing rates low.
Stocks fluctuated, as is typical after a Fed announcement. In late afternoon trading, the Dow Jones industrial average fell 48.52, or 0.6 percent, to 8,274.39. The Standard & Poor's 500 index rose 2.66, or 0.3 percent, to 897.76, and the Nasdaq composite index rose 22.40, or 1.3 percent, to 1,787.32.
Although the Fed has held its target interest rate steady since late last year, its statements have touched off big moves in stocks. In January, the statement coincided with hopes for a plan for banks' toxic assets; in March, the Fed announced it would start buying Treasurys; and in April, the Fed said it was seeing signs the recession is easing.
Stocks had been sharply higher in the early going following a surprise jump in orders for big-ticket manufactured items. The Commerce Department said durable goods orders rose 1.8 percent in May. Economists surveyed by Thomson Reuters had anticipated a drop.
The Commerce Department later said sales of new homes fell 0.6 percent last month, while the market had expected a rise.
Recent gauges of the economy have been improving, but they have not yet pointed to growth. Many investors are nervous that a recovery could be hampered if the Fed raises interest rates too soon or starts dismantling its emergency supports for the financial system.
"I don't think there's a whole lot of real good news," said Steven Stahler, president of The Stahler Group in Baton Rouge, La., referring to the Fed's outlook. "There's absolutely no clear-cut view or clear-cut evidence that we're out of the woods. There's nothing here that is a nice green light. It's more of the same."
In corporate news, software maker Oracle Corp.'s results late Tuesday for its most recent quarter exceeded analysts' average forecast. Oracle shares gained $1.39, or 7 percent, to $21.26, helping the tech-heavy Nasdaq.
Bond prices had been higher after a successful Treasury Department auction of $37 billion in five-year notes. Demand was stronger than at recent auctions.
Auctions have been going smoothly this year, but both bond and stock investors are looking for signs that demand for new Treasury supply might be waning. If demand trails off, the government will have to raise yields sharply to attract buyers. Treasury yields are closely tied to borrowing rates for consumers on loans such as mortgages.
In other trading, crude oil fell 72 cents to $68.52 a barrel on the New York Mercantile Exchange.
The dollar was mixed against other major currencies. Gold prices rose.
About two stocks rose for every one that fell on the New York Stock Exchange, where volume came to 763.2 million shares, compared with 821.6 million traded at the same point Tuesday.
The Russell 2000 index of smaller companies rose 3.94, or 0.8 percent, to 493.71.
Overseas stock prices advanced. Japan's Nikkei stock average rose 0.4 percent. In Europe, Britain's FTSE 100 rose 1.2 percent, Germany's DAX index rose 2.7 percent, and France's CAC-40 rose 2.2 percent.
Investors, many of whom have placed bets over the past several months on a late-year economic recovery, are on edge as the second half of 2009 approaches. The Dow is up 27.1 percent from the 12-year lows reached March 9, but the index has fallen about 5 percent since June 12.