Government bonds rallied, the dollar weakened and US stocks fluctuated between small gains and losses on Wednesday, as gauges of price pressures in the economy battled with Federal Reserve officials affirming that higher inflation will be transitory.

The blue-chip S&P 500 traded flat at lunchtime, having given up earlier gains, before slipping even lower to close down 0.2 per cent for the day. The tech-heavy Nasdaq Composite traded flat for much of the afternoon, closing marginally lower.

The softer performance on Wall Street followed data showing declining consumer confidence and higher home prices. Sales of newly built homes in the US fell more than expected last month, with higher prices stifling demand. The commerce department said new residential sales fell 5.9 per cent in April to an annualised rate of 863,000 units, which missed economists’ expectations of 970,000 units.

Fed vice-chair Richard Clarida reiterated the view held by many on the central bank’s board that inflation will be transitory. However, he also acknowledged that, “it may well be in the upcoming meetings, we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases”.

Ian Lyngen, an interest rate strategist at BMO Capital Markets, said the movement lower in stock markets, “speaks to the worry that scaling out of the extremely accommodative monetary policy stance would have negative ramifications for domestic equities”.

The yield on the benchmark 10-year Treasury slid 0.05 percentage points to 1.56 per cent as the price of the debt rose. This yield, which influences borrowing costs and equity valuations worldwide, approached 1.8 per cent in late March when inflation jitters were even stronger.

Despite nervousness, there is widespread expectation that the Fed will hold back from any immediate raising of interest rates or reduction to its bond purchases, despite signs of higher prices. Headline consumer price inflation in the US hit 4.2 per cent in the 12 months to April, the biggest jump in 13 years and more than double the Fed’s target of 2 per cent over time.

“The market has pushed expectations for Fed rate hikes further into the future,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.

The Fed views the leap in inflation as temporary as industries reopen following the height of the coronavirus crisis. While central banks have been raising rates to control inflation since the early 1980s, Fed chair Jay Powell has taken the world’s most powerful rate-setter in a new direction by tolerating price rises instead of risking a slowdown in the post-pandemic economy.

The five-year forward inflation rate, a market measure of expected price rises over time in the US, has dipped to 2.25 per cent after climbing as high as 2.37 per cent earlier this month.

The dollar index, which measures the greenback against a basket of trading partners’ currencies, lost as much as 0.3 per cent on Tuesday before recovering to trade 0.2 per cent lower. The index remained around its weakest level of 2021 so far and has fallen more than 10 per cent in the past year.

Brent crude, the international oil benchmark, slipped 0.1 per cent to $68.39 a barrel.

The renewed drop in US yields is taking a toll on the dollar, said Win Thin, global head of currency strategy at Brown Brothers Harriman. “As we have said countless times before, these rates all need to rise in order for the dollar to mount a sustainable recovery,” he said.