Fed holds steady, sees low rates for 'extended period'

WASHINGTON (AFP) - – The Federal Reserve kept its stimulative monetary policy unchanged Wednesday and said it expects to hold "exceptionally low" rates "for an extended period" to support a US economic recovery.

Concluding a two-day meeting, the Federal Open Market Committee (FOMC) voted to keep the base federal funds rate in a range of zero to 0.25 percent, where it has been for over a year.

The panel headed by Fed chairman Ben Bernanke said recent data "suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating."

It said consumer spending, the main driver of economic activity, "is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit."

The committee said it will maintain the federal funds target range "and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Analysts said the FOMC sounded slightly more upbeat in its assessment of conditions.

"Today's statement provided a modest upgrade to the Fed's view on the state of the economy and financial markets," said Dawn Desjardins at RBC Economics.

"The economy is acknowledged to be strengthening, and the markets are supportive for growth. The pace of recovery is described as likely to be 'moderate' for a time rather than 'weak.'"

The 9-1 FOMC decision included one dissent, a departure from recent meetings, with Kansas City Fed president Thomas Hoenig contending that "the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted," the statement said.

Analysts said the dissent raises questions about whether the Fed is moving toward a so-called exit strategy from its extraordinary policies aimed at jolting the economy out of recession.

Hoenig "is only one but at least there is some pushback to the extraordinary easy money policy," said Peter Boockvar, analyst at Miller Tabak.

George Mokrzan, senior economist at Huntington National Bank, said the FOMC statement itself contains no hint that the Fed will move anytime soon to boost rates.

But he said the dissent "may be an indication that at least one member felt things are improving enough that one cannot dismiss the notion of raising rates."

Avery Shenfeld at CIBC World Markets said that even with the dissent, "there is a still a solid bloc of Fed members who are being extremely patient on monetary policy."

The central bank said it expects to stick to its schedule to wind down its trillion-dollar-plus effort to pump money into the financial system through the purchases of mortgage-backed securities and other debt.

"In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter," it said.

The panel "will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets," the statement added.

Ryan Sweet at Moody's Economy.com said the statement "suggests the Federal Reserve is confident it can stop acquiring agency and mortgage-backed securities without jeopardizing the housing recovery."

Other programs to help credit markets are also ending on schedule, the Fed said, including a program to back commercial paper for short-term corporate funding and swap arrangements with other central banks, both set to expire February 1.

For many, the meeting is overshadowed by the drama over Bernanke's confirmation for a second term.

Bernanke's fate hung in the balance as a growing number of senators caught in a new political landscape came out publicly opposed to the Fed chief, claiming he was going too easy on Wall Street banks and doing too little for average Americans.

A Senate vote was expected Thursday or Friday ahead of the expiration of Bernanke's term on Sunday.

Text of US Federal Reserve statement