WASHINGTON: The US Federal Reserve held its key interest rate at historic lows Wednesday and said the economy was continuing its modest recovery despite financial headwinds from abroad.

The Federal Open Market Committee said it was maintaining its federal funds rate target between zero and 0.25 percent, where it has been pegged since December 2008 to help the economy recover from its worst recession in decades.

The central bank`s rate decision was widely expected after economic reports since the last FOMC meeting two months ago showed the government-fueled recovery was still struggling.

"Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually," the policy-setting FOMC said in a statement at the conclusion of a two-day meeting.

The statement said that economic conditions were likely to warrant keeping "exceptionally low" rates "for an extended period," repeating the language used in previous statements.

"The pace of economic recovery is likely to be moderate for a time," said the panel headed by Fed chairman Ben Bernanke.

But the Fed statement suggested that Europe`s fiscal problems were taking a toll.

"Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," the committee said, likely referring to the eurozone sovereign crisis.

"The statement specifically noted the negative implications of the European debt crisis for US financial markets and the economy," said Augustine Faucher at Moody`s Economy.com.

"Given few inflationary pressures and the very high unemployment rate, an increase in the federal funds rate is unlikely until early 2011," he added.

The FOMC said that household spending, which usually accounts for two-thirds of the country`s economic activity, "is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit."

The Fed policymakers appeared less upbeat about the economy than in their statement two months ago, when they revised upward growth projections for 2010 and 2011, on signs the recovery that began in mid-2009 was gaining traction.

"The language used to describe the state of the economy is a bit more cautious than in April, marking the first meeting since the economy began to expand in which the FOMC was unable incrementally to firm up the tone of its comments," said Ian Shepherdson, chief US economist at High Frequency Economics.

Investment in nonresidential structures "is declining," the statement said, replacing the prior statement`s language of "continues to be weak."

On the inflation front, the policymakers said that already low inflation "has trended lower," suggesting the tendency would continue for some time. They noted that prices of energy and other commodities had declined "somewhat" in recent months.

"Given the enormous amount of slack in the economy, the Fed sees no inflationary pressures on the horizon; in fact, this statement seems to indicate that deflation is more of a concern than inflation," Moody`s Faucher said.

Nine of the 10 FOMC members voted to maintain the target range on the federal funds rate, the interest rate banks charge each other overnight.

The lone dissenter was Kansas City Fed president Thomas Hoenig, dissenting for the fourth time since the January 27 FOMC meeting.

The statement said that Hoenig objected to the "extended period" language because it could lead to "a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee`s flexibility to begin raising rates modestly."

That language was unchanged from the April 28 statement.

BDST: 1306 HRS, June 24, 2010
SIS/DC