Fed holds key interest rate near zero as U.S. economy continues to "pick up"

WASHINGTON, Nov. 4 (Xinhua) -- The U.S. Federal Reserve said on Wednesday that the U.S. economic activity has continued to "pick up," and decided to keep a key interest rate unchanged at a record low of between zero to 0.25 percent to prop up the economy.

Information received recently suggested that "economic activity has continued to pick up," the Fed said. But it also noted that "economic activity is likely to remain weak for a time."

In recent weeks, conditions in financial markets were roughly unchanged, but activity in the housing sector has increased over recent months, said the U.S. central bank in a statement following its two-day policy-making meeting in Washington.

Meanwhile, household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales, according to the Federal Reserve.

Although the economy is stabilizing, the Fed believes that the economy will keep a lid on inflation.

"With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable," the Fed "expects that inflation will remain subdued for some time."

Against this backdrop, the Fed decided to hold the key interest rate, or federal funds rate, which commercial banks charge each other for overnight loans, unchanged at a record low of between zero to 0.25 percent.

The decision means that commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25 percent, the lowest rate in decades.

Moreover, the Fed said that the interest rate is likely to remain at the current low level for "an extended period".

The Fed also decided to stay the course on existing programs intended "to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets."

As announced in previous meetings, the Fed will purchase a total of up to 1.25 trillion dollars of agency mortgage-backed securities. But the U.S. central bank said it would buy about 175 billion dollars of agency debt, less than the maximum of 200 billion dollars it had originally announced, citing limited availability.

The Fed said it will "gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010."

The policy setting Federal Open Market Committee (FOMC), which approved the monetary policy unanimously, said it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

"The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted," said the Fed in the statement.