U.S. data back recovery hopes but Fed cautious

By Ritsuko Ando and Alister Bull

NEW YORK/WASHINGTON (Reuters) - The Federal Reserve on Wednesday held interest rates near zero and sounded a cautious note on the economy, despite some hopes that the worst of the global economic downturn may soon be over.

The U.S. central bank, concluding a two-day meeting, said it would hold overnight rates in a range between zero to 0.25 percent and gave no hint of an imminent exit from its easy monetary policy.

The Dow Jones industrial average .DJI stock index fell on the news as the Fed's caution that the economy would remain weak for some time dampened hopes for a faster rebound.

"Most importantly, despite the signs of some modest improvement in current conditions, the (Fed) continues to indicate that economic activity is likely to remain weak for a time," said Morgan Stanley economist David Greenlaw.

The Fed's announcement comes amid mixed signals for the global economy.

Earlier on Wednesday, U.S. data showed an unexpected jump in orders for durable manufactured goods, while an OECD report said that prospects for economic recovery next year have improved for the first time in two years.

The Fed cut rates to near zero late last year to counter financial market turmoil and to try to pull the economy out of a deep recession. It has also been driving down borrowing costs by buying both government bonds and mortgage-related debt.

Economists said the Fed's cautious remarks on Wednesday may mean rates will be on hold until well into 2010. The dollar rose against the euro and yen after the Fed's decision.