U.S. data back recovery hopes but Fed cautious

NEW YORK/WASHINGTON (Reuters) - The Federal Reserve on Wednesday held interest rates near zero and sounded a cautious note on the economy, despite some hopes that the worst of the global economic downturn may soon be over.

The U.S. central bank, concluding a two-day meeting, said it would hold overnight rates in a range between zero to 0.25 percent and gave no hint of an imminent exit from its easy monetary policy.

The Dow Jones industrial average .DJI stock index fell on the news as the Fed's caution that the economy would remain weak for some time dampened hopes for a faster rebound.

"Most importantly, despite the signs of some modest improvement in current conditions, the (Fed) continues to indicate that economic activity is likely to remain weak for a time," said Morgan Stanley economist David Greenlaw.

The Fed's announcement comes amid mixed signals for the global economy.

Earlier on Wednesday, U.S. data showed an unexpected jump in orders for durable manufactured goods, while an OECD report said that prospects for economic recovery next year have improved for the first time in two years.

The Fed cut rates to near zero late last year to counter financial market turmoil and to try to pull the economy out of a deep recession. It has also been driving down borrowing costs by buying both government bonds and mortgage-related debt.

Economists said the Fed's cautious remarks on Wednesday may mean rates will be on hold until well into 2010. The dollar rose against the euro and yen after the Fed's decision.

MIXED PICTURE

Mixed economic indicators have also been keeping global investors guessing about the markets' direction.

Earlier data showed new orders for long-lasting U.S. manufactured goods rose unexpectedly by 1.8 percent in May, surprising analysts who had expected a fall of 0.6 percent.

A separate report showed that U.S. mortgage applications climbed last week from a seven-month low, adding to hopes that the three-year housing market collapse may be abating.

But another set of U.S. data showed sales of new single-family homes slipped in May, underscoring that conditions in the hard-hit housing market were still fragile.

The Organization for Economic Cooperation and Development said that the global slowdown is nearing bottom.

The economies of its 30-member countries should return to modest growth of 0.7 percent next year, a big reversal from a 4.1 percent fall this year, and a previous forecast for a 0.1 percent contraction.

"This is the first time since 2007 that we have revised up the projection," OECD Chief Economist Jorgen Elmeskov told Reuters after the release of the OECD's economic outlook.

"The bad news is that the projection still implies that we are only nearing the bottom now, and the recovery that follows is going to be a very slow one, probably a fragile one," he said.

The euro traded at $1.3936 late on Wednesday, down 1 percent for the session, according to Reuters data. Against the yen, the dollar was up 0.4 percent at 95.55 yen on electronic trading platform EBS.

The euro-zone currency had earlier come under pressure after the ECB allotted a higher-than-expected 442 billion euros ($613 billion) in funds at a flat rate of 1 percent.

Central banks around the world have been trying to restore order in money markets and reduce borrowing costs for banks, firms and consumers.

The pan-European FTSEurofirst .FTEU3 rose after the ECB tender results, and was up 2.4 percent.

The MSCI world equity index .MIWD00000PUS was up 1.5 percent after hitting its lowest since May 18 on Tuesday.

Japan's Nikkei average .N225 rose 0.43 percent, although government data suggested a recovery for the export-dependent economy could be slow and erratic. The value of Japanese exports tumbled 40.9 percent in May from a year earlier, worse than the 39.1 percent markets had expected.