By Mark Felsenthal and Pedro da Costa

WASHINGTON (Reuters) – The Federal Reserve voiced a cautious note of optimism on the U.S. economy on Wednesday as it stuck to its pledge to keep interest rates near zero for a while to ensure a sustainable recovery.

The policy statement reflected a somewhat brighter tone than it had at the previous meeting in December, although the Fed removed a reference to improvement in the housing market.

“Economic activity has continued to strengthen and … the deterioration in the labor market is abating,” the Fed said after a two-day meeting. In December, the Fed had said only that economic activity had “continued to pick up.”

The decision to hold rates steady was 9-1, with Kansas City Federal Reserve Bank President Thomas Hoenig dissenting because he wanted the central bank to eliminate a phrase vowing to keep rates exceptionally low for an extended period.

The Fed said Hoenig believed “economic and financial conditions had changed sufficiently” to drop the pledge.

Prices for U.S. government debt turned negative, while stocks initially slipped before moving marginally higher. The dollar extended gains against the euro.

The Fed reiterated that it was shuttering an array of emergency lending programs on February 1 and said its dollar swap arrangements with overseas central banks would also end on that date. It also announced a firm end date for a lending program for banks to obtain short-term loans.

“The statement is overall a positive one,” said Kurt Karl, chief U.S. economist at Swiss Re in New York. “The Fed is saying they have enough confidence in the markets to let the liquidity measures expire as expected.”

In its statement, the Fed’s policy-setting committee ratcheted up a notch its view of how the recovery from the deepest U.S. recession since the Great depression was unfolding.

“Although the pace of economic recovery is likely to be moderate for a time, the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability,” it said. After its meeting last month, the Fed had said activity was likely “to remain weak for a time.”

The economy resumed growing in the third quarter and most economists think it expanded at a rapid clip in the final three months of 2009.

However, with the jobless rate at 10 percent, consumer spending is likely to remain subdued. The housing market, which was at the root of the recession that began in December 2007, has also shown worrisome signs of renewed weakness.

Figures released earlier on Wednesday showed sales of newly constructed homes fell unexpectedly in December. That came on the heels of another report earlier this week that showed a steep drop in sales of existing homes.

The Fed dropped a reference that had been included in December’s statement which said the housing sector “has shown some signs of improvement over recent months,” tempering other tweaks to its statement that brought a slighter brighter tone.

In an effort to stem the worst financial crisis in generations, the U.S. central bank not only slashed interest rates but also undertook a series of emergency actions to soothe ailing credit markets.

One such measure is the purchase of some $1.43 trillion in housing-linked debt aimed at helping the mortgage market recover from its worst downturn in modern history.

The Fed repeated its intention to allow the program to conclude as scheduled by the end of March, but repeat it was prepared to change tack if needed to support economic growth.

The decision comes amid a firestorm in Washington over Ben Bernanke’s nomination to a second term as chairman of the U.S. central bank.

Once expected to sail through the Senate, his confirmation vote ran into stiff resistance last week, sending Wall Street, which strongly backs the chairman, sharply lower on Friday.

Financial markets, which took a drubbing last week, have stabilized as Bernanke’s confirmation began looking more certain. The latest Reuters tally showed 49 out of 100 senators were likely to vote for Bernanke, while 19 vowed to vote against him. The rest remain undecided.

The Senate will take up the nomination on Thursday with a vote to overcoming procedural roadblocks. A final confirming vote could also come the same day.

Source: Yahoo finance

Tags: dow, feb meet, federal meet US, interest rates, nasdaq

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