Updated from 2:46 p.m. EST

The

Federal Reserve

refrained from changing its target interest rate Wednesday, saying it will instead continue looking to its list of emergency programs to prop up the U.S. economy.

The Federal Open Market Committee, the policymaking arm of the central bank, elected to leave the fed funds target rate unchanged in the range of zero to 0.25% that was established at the FOMC's last meeting in December.

For Fed watchers, the decision came as no surprise. As it said following the conclusion of its Dec. 16 meeting, the FOMC said it anticipated that weak economic conditions would probably warrant "exceptionally low levels" of the fed funds rate for some time.

One of the more unfortunate observations this time was the statement that recent data "suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly."

While the central bank said that some market areas have improved, credit conditions for individuals and businesses remain "extremely tight." The FOMC believes a recovery in economic activity could start later this year, "but the downside risks to that outlook are significant."

Rising inflation isn't likely to be a problem for the coming quarters, the FOMC said.

The establishment of a range last month was a departure from the Fed's standard procedure. Since 1995, the Fed has explicitly stated a target level for the fed funds rate. Before the previous meeting, the Fed's target had never dipped below 1%.

The Fed once again pledged to utilize other tools, such as the purchasing of mortgage-backed securities and the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.

"That was the longest statement I've ever read, and it contained the kitchen sink. They'll do everything and anything necessary," said Paul Mendelsohn, chief investment strategist with Windham Financial. "They are prepared as market conditions change to do anything they have to do."

Some have questioned the effectiveness of the Fed's other methods of steering the U.S. economy, as the central bank must now depend on alternative strategies rather than monetary policy in order to relieve stopped-up flows of credit in a rapidly sinking economy. Since the previous FOMC meeting, several reports have showed that economic activity continues to worsen.

Between the two most recent FOMC policy decisions, unemployment has jumped and the housing market has continued to suffer. On Jan. 9, the Labor Department said that the U.S. economy lost 524,000 jobs in December, and the jobless rate surged to 7.2%, the highest read since early 1993.

Since then, several companies have announced plans for further workforce reductions, including

Caterpillar

(CAT) - Get Report

,

Target

(TGT) - Get Report

,

Home Depot

(HD) - Get Report

,

General Motors

(GM) - Get Report

,

Sprint Nextel

(S) - Get Report

and

Alcoa

(AA) - Get Report

, among many others.

On the housing front, the Jan. 27 release of the November read on the Standard & Poor's/Case-Shiller index showed that home prices tumbled by a record 18.2% from a year earlier, with all 20 of the surveyed cities reporting declines.

Price decreases have accelerated amid poor credit conditions, substantial deterioration in the labor market and foreclosure sales, according to Tony Crescenzi on his

RealMoney.com

blog.

Mendelsohn argues that the benefit of the Fed's actions won't be readily observed in economic data. "These are really unusual times, so to say it's not working well enough yet is relative. We don't know what we're comparing it to yet," he said. "Employment is a lagging indicator, and the Fed is clearly trying to get out in front of it. You don't resolve that issue until you stabilize consumer confidence and people go out spending again."

Art Hogan, chief market strategist with Jefferies, agrees that the Fed's actions will not have a direct effect on economic data. "Their way of putting liquidity into a system isn't by making credit cheaper, it's by directly affecting cash levels," Hogan said. "You've seen credit markets open more, mortgage rates are going down and credit spreads are tightening. You have to look away from the economic data stream and look towards the credit market."

Analysts were more interested in two specific remarks the FOMC made in the accompanying statement. In one, policymakers raised the specter of deflation by remarking that they see "some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

"That's the part of the statement that really struck me," Mendelsohn said. "That's referencing the Japan deflation problem. You need a certain degree of inflation in the system to work."

Separately, the Fed said it was prepared to purchase longer-term Treasury securities "if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."

Jeffrey Lacker, president of the Richmond Fed, voted against the decision, saying he would rather see more Treasury debt purchases than targeted credit programs.

Market participants also appear as though they wanted more of a commitment from the FOMC, even though policymakers upped the rhetoric from their December meeting. Back then, they said they were "evaluating the potential benefits of purchasing longer-term Treasury securities," and that was revised to being "prepared to purchase longer-term Treasury securities" in the current statement.

Following the statement's release, the 10-year note dropped 1-1/32 in price, pushing the yield to 2.64%. The 30-year note dropped 3-12/32 in price to boost the yield up to 3.40%.

"You're seeing an unwind of some of the hope and anticipation the Fed was committed to making a purchase soon," said David Ader, bond strategist with RBS Greenwich Capital. "They've certainly moved from evaluating to being prepared, which is significant. But now you actually have to get the buyers in the shop."

Robert Pavlik, chief market strategist with Banyan Partners, said the Fed will need to counteract the eventual rise in Treasury rates as investors exit out of long-term government securities and move into equities.

"Eventually, there's going to be a pretty dramatic increase in Treasury rates as people sell out of them and try to get back in the equity market," Pavlik said. "The Fed has to stand ready to keep a lid on Treasury rates in order to let the economy expand without having interest rates jump up dramatically."

Additionally, Pavlik says an issue arises because the Treasury Department continues to issue more bonds. "That obviously creates upside pressure on rates," he said. "One hand is not necessarily working with the other."

While an increase in longer-term yields usually indicates rising inflation, that may not be the case now. "Since gold is trading down, the rise in Treasury yields is a positive and shows an improvement in confidence," Mendelsohn said. "The Fed doesn't want the 10-year Treasury to take off because of the tie to mortgages, but they could be intervening in the mortgage securities market to offset some of that gain."

The problem, Mendelsohn says, is that the Fed continues to walk a very fine line. "If this market takes off and things improve, things are going to turn on the Fed very fast. If everyone is trying to get out of Treasuries all at the same time, there's going to be trouble."