Fed cites economic strength, keeps rates low

WASHINGTON - Federal Reserve leaders left their target interest rate near zero and restated their intention to keep rates very low for an "extended period" Wednesday, even as they modestly upgraded their assessment of the economy.

"Economic activity has continued to strengthen," said the Federal Open Market Committee in a statement following a two-day policy-making meeting, and "the labor market is beginning to improve." That represents a slight improvement from the assessment issued after its mid-March meeting, when it said only that the job market was "stabilizing."

Fed leaders left the federal funds rate in a range of zero to 0.25 percent, where it has been since December 2008, and said that conditions are likely to justify leaving the rate at "exceptionally low" levels for "an extended period."

The Fed has used that language in every policy statement over the past 16 months, and it signals that leaders of the central bank do not anticipate raising rates in the near future.

Some analysts in financial markets had expected the Fed to soften or remove that language, opening the door to rate increases later in the year.

The statement reiterated the criteria that would lead leaders of the central bank to think about raising rates. The ultra-low rate policy is driven by "low rates of resource utilization," meaning an economic activity well below its potential; "subdued inflation trends," and "stable inflation expectations."

None of those three conditions had changed much since the last policy meeting in mid-March.

The Fed statement gave no signal about whether the central bank will sell off any of its $1.25-trillion portfolio of mortgage-backed securities. Acquired as part of a strategy to try to stimulate the economy by expanding the money supply and push down mortgage rates, the Fed ceased purchasing those securities March 31.

Now some members of the policy committee would like to sell off the bonds, in order to shrink the Fed's balance sheet and reduce the risk of a burst of inflation down the road. Several FOMC members have made those arguments publicly in recent weeks, and Chairman Ben Bernanke has not ruled out selling off some of the assets.