Fed sees rates near zero for extended period

The US Federal Reserve tonight expressed growing confidence that an economic recovery was building, even though it stuck to its commitment to keep borrowing costs near zero for 'an extended period'.

As expected, the Fed kept its benchmark federal funds rate unchanged in a range of zero to 0.25%, and said the US economy had 'continued to pick up' since its last policy-setting meeting in September.

The Fed, the US central bank, also said it would buy about $175 billion of debt issued by government-backed mortgage finance agencies, less than the $200 billion maximum it had originally allotted, citing limited availability.

In its closely watched policy statement, the Fed said household spending 'appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.'

That was somewhat more upbeat than September's statement, which referred to spending as 'stabilising'.

The central bank, wary of undercutting the fragile recovery by withdrawing its support too soon, is also on guard for any indication that its emergency lending efforts are fueling an unwelcome bout of inflation as the economy heals.

But top Fed officials, including Chairman Ben Bernanke, have said the US recession, the most painful since the 1930s, has left a legacy of high unemployment and idle factories that should keep price pressures in check.

The world's largest economy grew at a faster than expected 3.5% annual rate in the third quarter, which effectively signaled the end of the downturn. Suggesting further momentum, data on Monday showed manufacturing activity hit its highest level in three and a half years last month, though a report today showed the nation's vast services sector was growing only modestly.

In an act demonstrating confidence in the economy's prospects, billionaire investor Warren Buffett yesterday said his company, Berkshire Hathaway, agreed to purchase the nation's largest rail company, saying it is poised to benefit from the recovery.

While the outlook has improved, many economists still expect the recovery to be sluggish and in need of the Fed's easy-money policies for a while longer.

Unemployment is expected to climb into next year, damping consumer spending, which accounts for around 70%of US output. The banking system is still under pressure from loan losses, and credit remains tight.

Most analysts at top US banks have been expecting the Fed to keep interest rates on hold until mid-2010 or later.

Before it raises rates, the Fed is expected to begin to withdraw some of the enormous amounts of cash it pumped into the economy after chopping rates to near zero. That withdrawal of liquidity from the financial system is seen as key to containing inflation risks.

Other central banks around the world are also wrestling with how best to spur growth and when to withdraw extraordinary measures to support their economies.

The European Central Bank is expected to keep rates on hold at a record-low 1% tomorrow, while there is a good chance the Bank of England will expand its large asset purchase programme at a meeting the same day.