Fed holds policy steady, sees recession easing

By Alister Bull and Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve on Wednesday stuck to its huge program of buying government and mortgage debt, which is designed to keep borrowing costs low and boost recovery, and said it saw signs that the deep U.S. recession was easing.

The U.S. central bank kept interest rates near zero percent and signaled less concern on deflation, which is considered a threat to the economy because a pattern of falling prices causes consumers and businesses to delay purchases, dragging the economy down further.

It also said inflation would "remain subdued for some time" and provided no hint on an imminent exit from bold policy easing, despite fears among investors the huge U.S. stimulus could stoke price increases.

"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing," the Fed said in its policy statement at the end of a two-day meeting. "Conditions in financial markets have generally improved in recent months."

The Fed said it decided to hold overnight interest rates in a zero to 0.25 percent range -- the level reached in December -- and repeated that rates would likely stay unusually low for some time.

But the Fed cautioned that the economy would remain weak for a time, and the Dow Jones industrial average fell on the news. Economists said the Fed's outlook means rates will be on hold until well into 2010.

"The Fed is highly likely to hold short rates at rock-bottom levels until the volume of economic 'slack' ... is substantially lessened, which means short rates are unlikely to rise any time soon," Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut, wrote in a client note.

The dollar extended gains against the euro and the yen while prices on U.S. government debt fell in disappointment that the Fed did not increase its purchases of longer-dated Treasuries.