) -- The

Federal Reserve

held its target interest rate near zero as expected Wednesday, continuing the central bank's cheap money policy as the economy slowly mends from the most severe economic downturn since the Great Depression.

The policy-making Federal Open Market Committee's statement acknowledged recent signs of the economy's improving health in references to an improving labor market, even as the Fed reiterated its expectation that inflation "will remain subdued for some time."

"The committee will maintain the target range for the federal funds rate at zero to 0.25% and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the FOMC said in the statement, which was released at 2:15 p.m. EST.

Jobs Will Drive Rate Hike

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Stocks closed mixed, but flat after the decision. The

Dow Jones Industrial Average

shed 11 points to 10,441, while the

S&P 500

added 1.3 points to 1109 and the


edged up 5.9 points to 2207.

The decision to leave the fed funds rate unchanged comes a year to the day it dropped the benchmark to its current level from 1%. Fed Chairman Ben Bernanke and other Fed speakers have recently been reiterating the central bank's intention to keep rates low for an extended period, as long as unemployment remains high and the inflation outlook is stable.

Wholesale prices

, measured by the producer price index, jumped 1.8% in November, easily outpacing expectations, the Labor Department reported Tuesday. The

consumer price index

for November, released by the Labor Department Wednesday, met expectations for a rise of 0.4%, somewhat blunting inflation fears.

Earlier this month brought encouraging news in the jobs market, as the Labor Department's November nonfarms payroll report showed a loss of 11,000 jobs vs. the projected 125,000 decline. And over the past two weeks, even troubled banks like

Bank of America

(BAC) - Get Report



(C) - Get Report


Wells Fargo

(WFC) - Get Report

moved to repay government bailout funds.

"The only real changes were to the financial conditions. They upgraded the job market and gave slight upgrades to housing and consumer spending," said John Canally, an economist for LPL Financial. "By reviewing economic improvements, that allowed them to go through their liquidy facilities, demonstrating that they've had them in place for a while and setting the stage to eventually allow these things to drop off. In that way, the statement could be seen as a passive tightening because they're setting the stage to remove the extended process down the road."

Future meetings will likely feature more extensive comments about economic conditions, assuming that the economy continues to improve, Canally said.

"They're going to give even bigger upgrades to conditions at the next meeting and then at the next meeting but you have to see them making stronger statements about improvement before they would even think about changing rates," he said.

In the section detailing some liquidity measures taken during the credit crisis, the central bank said it plans to continue to slow its mortgage-backed securities and agency debt purchases, winding the program down by the end of the first quarter. The Fed also has set a Feb.1 expiration date for its special liquidity facilities and said it will work with central bank counterparties to close its temporary liquidity swap arrangements by that same date.

Amounts provided under the Fed's Term Auction Facility will continue to dwindle through the early part of 2010, according to the statement. The Fed said it would stop issuing loans through the Term Asset-Backed Securities Loan Facility by June 30 for loans backed by new-issue commercial mortgage-backed securities and by March 31 for loans backed by other collateral.

"By making this timetable explicit in the statement, the FOMC is sending a clear message that it will exit from these extraordinary 'financial life supports' as the financial markets function more normally on their own," said PNC chief economist Stuart Hoffman. He added that this is the first stage of the Fed exit strategy, to be followed by raising the Fed funds rate and the interest rate paid on bank reserves sometime in September 2010.

"Prior to the first rate hike, the FOMC will delete the 'extended period' language--probably at the April or June 2010 FOMC meetings -- as a signal that a funds rate hike is coming within six months," Hoffman said.

Ralph Fogel, an investment strategist for Fogel Neale Partners, didn't see anything in the Fed statement that would significantly impact the market.

"This is a very slow time of year for equity markets and it's showing. The market is in an uptrend and it's been under pressure," Fogel said, noting that despite last week's higher and lower sessions, the market remained largely unchanged. "We're holding up to the end of the year but I think at the beginning of next year, we're going to get a correction of some sort."


Written by Melinda Peer in New York.