Fed holds policy steady, less worried on deflation

Market falls on Fed decision
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By Alister Bull and Mark Felsenthal
WASHINGTON (Reuters) - The Federal Reserve on Wednesday stuck to its huge program of buying government and mortgage debt and said it saw signs that the deep U.S. recession was easing.
The Fed -- the U.S. central bank -- kept interest rates at nearly zero and signaled less concern on deflation.
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 prices.
Concluding a two-day meeting, the Fed 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.
The Dow Jones industrial average stock index fell on the news as the Fed's caution that the economy would remain weak for a time dampened hopes for a faster rebound. Economists say this 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.
QUANTITATIVE EASING
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."
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 STEADY Continued...
Source: Reuters