U.S. Fed sees rates near zero for "extended period"

By Mark Felsenthal and David Lawder

WASHINGTON (Reuters) - The U.S. Federal Reserve on Wednesday 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 central bank closed out a two-day meeting with a decision to keep benchmark overnight interest rates in a range of zero to 0.25 percent. The vote was unanimous.

In a statement announcing the decision, the Fed said the U.S. economy had "continued to pick up" since its last meeting in September, but it expressed concern that the economy's recovery was likely to be muted.

"Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," it said. While still emphasizing risks, the Fed was a bit more upbeat than it was in September, when it had simply said spending was "stabilizing."

In another shift, it said it would buy only about $175 billion of debt issued by government-backed mortgage finance agencies, down from the up to $200 billion it had planned to purchase, citing limited availability of the paper. The Fed has been buying mortgage-related debt to help keep home mortgage borrowing costs low.

U.S. stocks prices were higher mid-afternoon after the Fed statement, with the Dow Jones industrial average and S&P 500 stock index were both up more than 1.0 percentage point. Data published earlier on Wednesday, showing activity in the U.S. services sector continuing to expand and job losses continuing to decline also supported stock prices.

U.S. government debt prices rose sharply, while interest rate futures turned higher as traders cut bets that the Fed would soon step back from its easy money policy. The U.S. dollar fell against the euro.

"I would say there are no surprises at all. If there is any surprise, it sounds like there is not even any hint that they are going to raise rates soon," said Robert MacIntosh, chief economist at Eaton Vance Corp in Boston. "We've got a number of Fed meetings to go before we will get any kind of increase."