By CAMPION WALSH and BENTON IVES-HALPERIN

December 12, 2006 2:26 p.m.

WASHINGTON -- The Federal Reserve on Tuesday held the federal funds rate steady at 5.25% for a fourth-straight time, while signaling it may yet raise interest rates again if inflation doesn't subside as it expects.

Building on language from statements at its previous two meetings, the central bank's policy-making Federal Open Market Committee said the economy slowed during 2006 in response to "a substantial cooling of the housing market," but it remains concerned about "elevated" core inflation and inflationary pressures.

The Fed added the word "substantial" to its description of the housing market slowdown. "Economic growth has slowed over the course of the year," the FOMC said in a statement accompanying its rate decision. "Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters."

The FOMC repeated its assessment that inflationary pressures "seem likely to moderate over time" thanks to a reduced push from energy prices, "contained inflation expectations" and the lagged effect of the 17-straight interest-rate increases it made from the summer of 2004 to the summer of 2006.

But the committee also continued to qualify that outlook by saying "some inflation risks remain," core inflation indicators "have been elevated" and inflationary pressures could be sustained by high "resource utilization," a term referring to tight job markets and high industrial operating rates.

In a speech late last month, Fed Chairman Ben Bernanke described core inflation -- excluding food and energy -- as "uncomfortably high," as economic growth slowed roughly in line with the Fed's projections. In recent months core inflation has remained above the central bank's understood comfort zone of 1%-2%, but it has stayed within the range of the Fed's inflation forecast for this year.

With its statement Tuesday, the Fed again emphasized the importance of new economic data. "The extent and timing of any additional firming that may be needed to address these [inflationary] risks will depend on the evolution of the outlook for both inflation and economic growth," the statement said.

The Fed voted 10-to-1 to leave the fed funds rate unchanged. Richmond Fed President Jeffrey Lacker dissented for the fourth straight meeting, preferring a quarter percentage-point increase. Together with the FOMC's repeated warning about inflation risks, Mr. Lacker's continued dissent could be taken as a sign of a sustained degree of Fed vigilance on inflation.

The mostly static wording of the FOMC's statement was consistent with financial market expectations, which have been less inclined in recent weeks to expect the Fed to ease credit in the near-term. "Market reaction to an inherently unchanged statement is likely to be fairly muted," Merrill Lynch government debt strategist Joseph Shatz said in a note to clients ahead of the meeting.

Last Friday's report of relatively robust jobs growth in November indicated the economy has been stronger than anticipated in some quarters, paring back expectations the Fed will cut interest rates in the first half of 2007. Market adjustments in the wake of the jobs data suggest there will be little reaction to steady policy and language from the Fed, Mr. Shatz said.

After Tuesday's FOMC statement, "we'll still have an argument about whether the next move by the Fed will be to raise rates or to cut them," said Wachovia Corp. economist Mark Vitner. With the economic slowdown limited to housing and auto production, the Fed is getting the "soft landing" for the overall economy that it wants, Mr. Vitner said.

In a forecast released Monday, the Securities Industry and Financial Markets Association said the Fed will likely cut its short-term rate target a quarter percentage-point by the end of 2007 to 5.0%, but the association said some members of its advisory panel thought the Fed had more credit-tightening in store.

Public remarks by Mr. Bernanke and other Fed monetary policy makers have stressed the uncertainty of the outlook for future FOMC decisions, in contrast to some financial market expectations that the central bank would cut interest rates early next year.

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