CHICAGO — The Federal Reserve opted yesterday to keep interest rates unchanged but cautioned anew that the economy continues to face "some inflation risks."

The housing market's sharp decline has taken a toll on the economy's growth during 2006, the central bank conceded. But even as it acknowledged that recent economic reports have provided "mixed" evidence, the Fed reiterated that the U.S. economy "seems likely to expand at a moderate pace" over the next several months.

That phrasing suggests that Fed officials, while anxious to demonstrate that they're aware of the economy's slowing momentum, nonetheless remain worried more about inflation's potential threat.

The decision to stand pat on rates had been expected, and the Fed's language offered only a mild hint of future rate loosening.

The Fed "remains finely balanced between its mandate to foster sustainable growth and contain inflation," said Action Economics economist Michael Wallace.

Ian Shepherdson of High Frequency Economics said that with yesterday's statement the central bank "continues its painfully slow retreat from the tightening cycle."

Beginning in mid-2004, the Fed methodically raised short-term interest rates over a period of two years, moving to make sure that inflationary pressures remain under control. But after 17 consecutive quarter-point hikes, it paused its tightening campaign in June.

Yesterday's meeting was the fourth consecutive gathering at which policymakers at the Fed's Open Market Committee decided to stay on the sidelines, leaving the short-term borrowing rate, known as the federal funds rate, unchanged at 5.25 percent.

Investors routinely scrutinize the Fed's choice of words for clues as to whether the committee considers inflation the biggest concern, which indicates a bias toward higher rates, or whether officials think the economy is sagging, which would suggest the Fed is leaning toward softening rates.

Yesterday, the Fed's statement was only marginally different. Officials used the word "substantial" for the first time to describe the housing market's decline, for example, and that was a telling change for many observers.

The once-hot housing sector, pinched by higher interest rates, has gone into a funk that has cost more than 100,000 industry workers' jobs over the past several months, and Naroff Economic Advisors head Joel Naroff responded to the Fed's newly inserted adjective with a terse "Welcome to reality."

The other significant change was the insertion of the phrase, "Although recent indicators have been mixed," in front of the phrase, "the economy seems likely to expand at a moderate pace on balance over coming quarters."

"It seems clear," said Merrill Lynch economist David Rosenberg, "that the Fed is in the process of downgrading its forecast of the economy" and appears to be inching closer to a point where the danger of economic weakness is considered equal to the danger of inflation.

ClearView Economics economist Ken Mayland called the Fed's language changes "a baby step towards a future Fed easing."

But before that happens, he said, the Fed will need more evidence of widespread economic weakness than it has seen to date.

Most experts think that the Fed is done raising rates, but opinion remains divided as to when it will begin easing rates. Some economists have been predicting that the economy will slow so fast in coming months that the Fed will begin lowering rates in March. But most think it will be the second half of 2007 before rates begin to move downward.

In recent weeks, a number of different economic reports have showed that growth in the U.S. economy is slowing, with the housing and auto industries experiencing painful retrenchment. At the same time, consumer spending has held up, at least so far, and conditions in the nation's vast service sector remain strong.

"The Fed managed to change 14 words today, and they speak volumes," Rosenberg said. "We believe that they are becoming more, not less, concerned over the housing downturn."