Federal Reserve keeps federal funds rate unchanged

Federal Reserve leaders left their target interest rate near zero on Tuesday 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," the Federal Open Market Committee said in a statement after a two-day policymaking meeting, and "the labor market is beginning to improve." That represents a slight improvement from the assessment issued after the leaders' last policy meeting, in mid-March, when they said only that the job market was "stabilizing."

Fed leaders left the federal funds rate in a range of zero percent to 0.25 percent, where it has been since December 2008, and said conditions are likely to justify leaving it 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 thought the Fed might soften or remove that language, opening the door to rate increases later in the year.

"They don't want to do anything that might short-circuit the recovery," said Anthony Chan, chief economist of J.P. Morgan Private Wealth Management.

The statement reiterated the criteria that would prompt leaders of the central bank to consider raising rates. The policy of maintaining ultra-low rates 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 conditions has changed much since the March meeting.

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

Now some on the policy committee want to sell the bonds to shrink the Fed's balance sheet and reduce the risk of inflation down the road. Several members have made those arguments publicly in recent weeks, and Chairman Ben S. Bernanke has not ruled out selling the assets at some point.

"They will probably shrink the balance sheet before they really do much to raise interest rates," said Bruce McCain, chief investment strategist for Key Private Bank.

Other Fed officials are reluctant to do so, viewing the economy as a whole -- and the housing market in particular -- as being sufficiently weak that selling off the assets could damage the recovery by pushing up long-term interest rates. Moreover, these officials say, inflation pressures are remote and the Fed has the tools to prevent inflation even without asset sales.

There was one dissent from the decision, by Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, who also dissented at the last two meetings, preferring that the language about keeping rates low for an "extended period" be eliminated.