Fed says U.S. recession appears to be easing

By Mark Felsenthal and Alister Bull

WASHINGTON (Reuters) - The Federal Reserve said on Wednesday the outlook for the U.S. economy had improved a bit in recent weeks but that low interest rates would be needed for some time to ensure it recovers from its deep recession.

Wrapping up a two-day policy meeting, the U.S. central bank said it had decided to hold benchmark overnight interest rates in the range of zero to 0.25 percent reached in December even as officials took stock of some recent hopeful economic signs.

"Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time," the Fed said in a statement.

"The economy has continued to contract, though the pace of contraction appears to be somewhat slower," it said.

Stocks shot higher and government bond prices sank as the Fed's announcement added to a sense of light at the end of the tunnel. The dollar rose against the yen but lost ground to the euro as investors' appetite for risk increased, easing demand for both the dollar and the yen as a safe haven.

"The economy has gone from being in a freefall and is now on the road to recovery," said Mark Vitner, an economist for Wachovia Securities in Charlotte, North Carolina.

After their last meeting on March 17-18, Fed officials had offered no hint the recession was abating and they announced plans to pump an additional $1.15 trillion into the economy.

On Wednesday, no new actions were announced, although the central bank repeated its pledge to use all available tools to promote recovery and reiterated a vow to keep rates low for an extended period.

A leading bond fund executive cautioned that the Fed runs the risk of a Japanese-style scenario of prolonged weak growth and deflation if policy-makers pull back from efforts to support the struggling economy prematurely.

"Today's statement suggests that policy-makers are now comfortable with partially taking their foot off the accelerator," Mohamed El-Erian, chief executive of Pacific Investment Management Co, told Reuters.

The United States appears to be moving through its economic crisis ahead of other major economies.

The European Central Bank looks set to cut rates to an historic low of 1 percent on May 7 and is considering other steps it can take to prop up a weak euro-zone economy.

In Japan, the central bank is expected to cut its forecast for the Japanese economy at a meeting on Thursday.

"GREEN SHOOTS" APPEAR

Fed officials are trying to pull the economy out of a deep recession that next month will become the longest since the Great Depression. They warned on Wednesday that with job losses mounting, households pinched by diminished wealth and credit still hard to get, consumers were still under pressure.