Reuters Fed holds policy steady, less worried on deflation

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. more...