Fed maintains low rates, upgrades view on US economy

The Federal Reserve has maintained record low interest rates but offered a modest upgrade to its view of the US economy still dogged by high unemployment and tight credit.

After a one-day meeting Tuesday, the central bank's policy body voted 9-1 to keep the federal funds rate -- at which banks charge each other for loans -- at a zero to 0.25 percent range, a Fed statement said.

The Federal Open Market Committee (FOMC) expected to hold the "exceptionally low" rate "for an extended period" -- reiterating its standard guidance since it slashed rates to record lows in December 2008 in a bid to jolt the world's largest economy from its worst recession in decades.

The central bank offered a slight upgrade to its view of the economy in the statement issued after the six-hour meeting chaired by Fed boss Ben Bernanke.Full Text:Federal Reserve statement

It said "economic activity has continued to strengthen and that the labor market is stabilizing" -- a more upbeat description than the phrasing used after its last policy meeting in January that "the deterioration in the labor market is abating."

The statement also noted that consumer spending was constrained by "high unemployment," rather than the previous "weak labor market," which some analysts said shifts the focus away from job growth to the unemployment level, hovering at nearly 10 percent.

After not mentioning housing, the epicenter of the financial crisis that plunged the US economy into recession, in the last statement, the Fed lamented Tuesday that housing activity has been "flat at a depressed level."

Analysts said that by keeping rates at ultralow levels, the cautious Fed was not prepared to take any chances of tinkering with monetary policy. It also gave no indication it would proceed with an monetary stimulus exit strategy.

"The next key event is likely to occur when the Fed alters its 'extended period' language in favor of something less committal; we think this change is likely to be made in second quarter, and it may occur as soon as the April meeting if labor market data strengthen notably, as we expect," said Barclays Capital Research analyst Dean Maki.

The Fed also stressed that the pace of economic recovery was likely to be "moderate" for sometime.

It said American households remained reluctant to spend amid high unemployment, modest income growth, lower housing wealth, and tight credit.

Employers also remained reluctant to add to payrolls and bank lending continued to contract, the Fed reported.

Kansas City Fed president Thomas Hoenig was, for the second meeting in a row, the sole dissenting voice to the FOMC decision.

He expressed concern that the promise of low interest rates for the long-run could present economic risks.

"However, the majority of the FOMC would agree with us that removing this phrase now would lead to an unwarranted rise in interest rates across the yield curve," said Brian Bethune, financial economist for IHS Global Insight.

The yield curve is what economists use to capture the overall movement of interest rates on the bond market.

"Credit, housing and employment markets are still too weak to be able to withstand this kind of negative pressure, and we agree with the majority of the FOMC on this score," Bethune said.

US authorities pumped hundreds of billions of dollars into the world's largest economy to jolt it from a deep recession since December 2007.

The economy started growing from the second half of last year -- at 2.2 percent in the third quarter and 5.9 percent in the final quarter of 2009.

Many believe the Fed will need to raise rates gradually to keep inflation in check.

"We do not consider any risk of changes in the direction of the Fed?s monetary policy, as economic slack is likely to hamper the inflation pressures for some more time," said analyst Inna Mufteeva of Natixis.

The Fed policy makers also confirmed at the meeting Tuesday that the central bank will complete purchases of 1.25 trillion dollars of mortgage-backed securities by the end of this month.

The program has been widely credited with pumping up the housing market, which was at the epicenter of the financial crisis triggered by a mortgage meltdown.