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Fed Keeps Rates Near Zero

WASHINGTON ( TheStreet) -- As expected, the Federal Reserve's policy-making arm left its target fed funds rate unchanged and maintained language suggesting that economic conditions would continue to "warrant exceptionally low levels for the federal funds rate for an extended period" on Tuesday.

Although much of Tuesday's review of economic conditions resembled the Committee's previous assessment in August, it did pave the way for the future implementation of additional quantitative easing, saying that the Committee is "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." That compares with the FOMC's vague promise in August to monitor conditions and use its policy tools accordingly.

Stocks, which had been trading slightly below the flatline throughout Tuesday's session, moved higher following the Fed's release. The Dow Jones Industrial Average was adding 47 points, or 0.4%, to 10,801 and the S&P 500 was gaining 2 points, or 0.2%, to 1145. The Nasdaq was also trading higher, by 4 points, or 0.2%, at 2360.

"I expected the Fed statement to have a positive effect on markets and it did," said Commonfund Chief Economist Michael Strauss, adding that bond investors may have been disappointed that the Fed didn't implement more aggressive action.

"Equities are rallying and most investors are underinvested in equities. This may be just the push they needed," he said.

Meanwhile, yields on Treasuries weakened. Prices on the benchmark 10-year Treasury rose 30/32, diluting the yield to 2.596%.

The statement also emphasized the lack of inflationary pressures, which the Committee expects will remain weak for a while.

"With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate," the Committee said.

At its August 10th meeting, the FOMC downgraded its assessment of the economy, saying that "the pace of recovery in output and employment has slowed in recent months" and that "the pace of economic recovery is likely to be more modest in the near term than had been anticipated." Despite recent economic data that has been less disappointing than in previous months, helping to calm fears of a double-dip recession, economic outlook expectations were largely restated in Tuesday's release. The committee also said it would maintain its policy to reinvest principal payments from its security holdings.

Earlier on Tuesday, the Commerce Department said housing starts rose 10.5% in August to a level not seen since April . Building permits also climbed to a higher-than-expected level during the month.

-- Written by Melinda Peer in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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