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.
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.
Underscoring the economy’s perilous state, a Commerce Department report showed on Wednesday that U.S. gross domestic product shrank by a larger-than-expected 6.1 percent annual rate in the first quarter, following a 6.3 percent decline in the fourth quarter of 2008.
The recession has already cost the economy 5.1 million jobs, driving the unemployment rate to a 25-year high of 8.5 percent in March. Economists expect the jobless rate to rise further.
Still, some data have supported Fed Chairman Ben Bernanke’s mid-March suggestion that that some “green shoots” could be seen emerging from the economic wreckage — even if only showing that the pace of contraction is slowing.
For example, first-time claims for unemployment aid have been running below the 26-1/2 year high touched in late March.
Similarly, while sales of previously owned homes fell in March, inventories of homes available for sale also fell, and some analysts saw the decimated housing sector, which is at the heart of the U.S. economic breakdown, as stabilizing.
The Fed’s Beige Book of anecdotal reports from across the nation issued on April 15 said five of the U.S. central bank’s 12 districts saw the pace of decline in the economy slowing.
Even the report on first-quarter GDP offered some hopeful signs. Consumer spending turned up and business inventories fell sharply, which could pave the way for future production.
At their last meeting, policy-makers reacted to a sense that the economy was deteriorating quickly with a massive expansion of their credit-easing efforts.
The Fed announced it would buy $300 billion in long-term U.S. government debt and increase purchases of debt and securities issued by government-supported mortgage agencies by $850 billion in a bid to lower mortgage and other interest rates.
Policy-makers said on Wednesday they would adjust purchases in response to the changing economic outlook and developments in financial markets.
Editing by Tim Ahmann, Dan Grebler and Jan Paschal