WASHINGTON -- The Federal Reserve on Wednesday held monetary policy steady and said the U.S. economic recession was easing, as it signaled its worries over a possible troubling downward spiral in prices were fading.
Concluding a two-day meeting, the central bank said it had decided to hold overnight interest rates in a zero to 0.25 percent range -- the level reached in December -- and repeated that they would likely stay unusually low for some time.
With the benchmark interbank lending rate virtually at zero, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and U.S. government bonds.
In a statement, the Fed's policy-setting panel said it would hold to a previous pledge to buy $1.45 trillion in mortgage-related debt by year-end and $300 billion in longer-term U.S. government debt by autumn, a decision financial markets had largely expected.
"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing," the Fed said. "Conditions in financial markets have generally improved in recent months."
U.S. stock prices slipped after the statement, with the blue chip Dow Jones industrial average falling into negative territory, while the value of the dollar rose and prices for U.S. Treasury debt dropped.
"It came out exactly as we expected it to. It was certainly more subtle than many had hoped for but nonetheless delivered a clear message that inflation and the economy will remain subdued for some time," said Michael Woolfolk, senior currency strategist at The Bank of New York-Mellon in New York.
The central bank dropped a phrase it had used in its last statement in April in which it warned inflation could run below desired levels for a time -- a suggestion officials were worried about a broad-based deflation.
While appearing more comfortable on deflation risks in their latest statement, policy-makers made clear inflation was not yet a concern.
"The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the committee expects that inflation will remain subdued for some time," the Fed said.
HOLDING A STEADY COURSE
The Fed cut rates to near zero at the end of last year as part of a campaign to counter turmoil in financial markets and pull the economy out of a recession that began in late 2007.
Even with these overnight rates as low as they can go, the U.S. central bank has found ways to lower other borrowing costs. In March, it more than doubled its planned purchases of of mortgage-related securities and announced a plan to buy Treasury debt to drive down benchmark yields.
At first, the initiative to buy government bonds pulled down longer-term rates, a boon to mortgage borrowers. But earlier this month yields on longer-term Treasuries climbed sharply as investors began to fret that the massive U.S. budget deficit and generous Fed lending could sow the seeds of future inflation, although yields have since retreated.
Fed Chairman Ben Bernanke sought to address the inflation concerns evident in financial markets in remarks on June 3 in which he told Congress financial stability and a return to economic growth could be elusive unless Washington made a firm commitment to budgetary restraint.
Fed officials have also argued that with high and rising unemployment and idle factories, a pickup in inflation is unlikely.
Economic reports since the Fed's previous meeting on April 28-29 suggest the downturn in the economy, the deepest in decades, is starting to abate. In perhaps the most hopeful sign, U.S. job cuts moderated in May, although the unemployment rate hit a nearly 26-year high of 9.4 percent.
Battered financial markets seem to be staggering to their feet as well, with the broad S&P 500 index up about 6 percent since the Fed's last meeting.
A government evaluation of the capital cushions at 19 of the nation's largest banks released in early May calmed investor worries about bank health as it found the sector's capital needs were not as dire as some had feared.
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