The Federal Reserve held interest rates steady Thursday, extending a yearlong breather for borrowers. Although policymakers observed improvements on inflation, they made clear they were not ready to declare victory on that front. Wrapping up a two-day meeting, Fed Chairman Ben Bernanke and his central bank colleagues left an important interest rate at 5.25%, the same as it was last June. The decision was unanimous.

The Fed's decision means that commercial banks' prime interest rates -- for certain credit cards, home equity lines of credit and other loans -- should stay at 8.25%. Before the Fed's interest-rate pause, borrowers had endured two years of rate increases. The current period of level rates can help them regain their footing by paying down or consolidating debt. Looking at economic conditions, Fed officials said readings on "core" inflation, which excludes energy and food prices, have gotten "modestly" better in recent months.

In noting this improvement, they abandoned language in previous statements that described underlying inflation as "somewhat elevated." Even so, Fed policymakers continued to identify the "predominate" risk to the economy as inflation's failure to moderate as they now anticipate. "A sustained moderation in inflation pressures has yet to be convincingly demonstrated," according to the statement.

Stocks ended the day almost flat. The Dow Jones industrials dipped 5.45 points to 13,422.28, as investors' hopes for a rate cut continue to fade. On the sidelines for eight straight meetings, the Fed does not want investors or consumers to think it is letting down its guard on inflation.

Inflation is bad for the economy and for the pocketbook. Out-of-control prices can eat away at paychecks, investments and standards of living. Core inflation rose 2% over the 12 months ending in April. That compares with March's 2.1% annual increase. Economists predicted underlying inflation should dip below 2% for the 12 months ending in May. That report was to be released Friday.

Gyrating energy prices are a wild card to the inflation outlook. Economists said there is always a risk that higher energy prices could affect other prices, which would boost underlying inflation. In trading Thursday, oil prices briefly topped $ 70 a barrel for first time since Sept. 1, but then settled back to $ 69.57 a barrel. Nationally, gasoline prices have eased in recent weeks but are above a gallon in some cities.

The Fed once again said future rate moves will hinge on what incoming data says about inflation and economic growth. Many economists believe the Fed will keep rates steady at its next meeting Aug. 7, and probably through the year. Fed policymakers upgraded their assessment of the economy's performance. They said growth appeared to have been moderate over the first half of the year despite the housing slump. In its previous assessment, in early May, Fed officials noted that growth had slowed in the early part of the year.

The economy barely moved in the year's first three months. It grew at a rate of just 0.7%, the slowest in more than four years. Among the factors for the anemic shows are the housing slump, lackluster business investment, a bloated trade deficit and cutbacks in federal spending. Consumer spending, however, was brisk, preventing economic growth from stalling out. A rebound is anticipated from April through June. Economic growth in those months could clock in anywhere from a 2.3% to better than a 3% pace, according to various projections. A few forecasts suggest growth could come in closer to 4%. The Fed stuck to its forecast that the economy probably would expand "at a moderate pace" over upcoming quarters.

Even as the economy has endured a nearly yearlong sluggish spell, the jobs market has proved sturdy. Employers nearly doubled the number of jobs they added to payrolls in May, allowing the unemployment rate to hold steady at a relatively low 4.5 percent. This solid job market, which also has produced wage gains for workers, has the potential to keep inflationary pressures alive, the Fed noted. The Fed's goal is for the economy to slow sufficiently to fend off inflation, but not so much as to slide into a recession.