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Fed Holds Rates Near Zero

As expected, the Federal Open Market Committee voted to keep rates at historically low levels.



) -- The

Federal Reserve's

policy-making arm left its target fed funds rate unchanged, as expected on Tuesday, and said it would reinvest proceeds from agency debt and mortgage-backed securities into long-term Treasuries as a way to prop up the flagging recovery.

In its

statement, the nuances of which are closely watched by Wall Street, the

Federal Open Market Committee

downgraded its assessment of the economy since its previous meeting in June, 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.

The FOMC's prior view of the recovery in its June 23 statement was that it was "proceeding" with the labor market "gradually improving." And, while the committee acknowledged at that time that financial conditions had become "less supportive" of economic growth, it put the bulk of the blame on "developments abroad."

The government's July employment report, which said the U.S. economy lost 131,000 nonfarm payrolls in July and 221,000 jobs in June, combined with Federal Reserve Chairman Ben Bernanke's recent description of the economic outlook as "unusually uncertain" during his semiannual monetary policy report, had many market watchers hoping that the FOMC would signal further stimulus policies.

Federal Reserve Board Chairman Ben Bernanke

Despite some concern that such policies

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would send the wrong message to an already nervous market -- especially since the Fed had allowed accommodative monetary policies to expire this earlier year -- stocks bounced off earlier lows following the statement's release.

"This decision is just confirming what the market already knows -- that things are slowing and that the Fed is looking for further ways to inject liquidity into the economy," said Curvin Miller, vice president at Russell & Co.

"Markets will view this as a positive because they like cheap money but the thing to remember here is that there's a lot of people sitting on the sidelines," Miller says. "Companies are at the mercy of consumers and the Fed is trying to find ways to entice consumers to spend. Meanwhile, people are trying to pay down debt and save."

In Tuesday's statement, the policymakers said that while household spending is showing gradual improvement, it's still hampered by the weak job market, mild income growth and tight credit.

Although Labor Department said the private sector saw its seventh consecutive month of job creation in July, adding 71,000 payrolls, the

national unemployment rate remains stubbornly high at 9.5%.

Once again, Kansas City Fed President Thomas Hoenig was the only member to vote against the policy -- as he has during the FOMC's four previous meetings.

Hoenig continues maintains that the economy is "recovering modestly" and believes that expectations for a long period of extremely low rates is no longer warranted and imposes limitations on the Committee, making it more difficult for them to adjust policy as needed.

The target interest rate has remained at the zero to 0.25% level since Dec. 16, 2008.

Furthermore, Hoenig disagrees with the necessity of keeping the Fed's long-term securities at current levels to support the FOMC's policy objectives.

Minutes from Tuesday's meeting will be released on Aug. 31.

-- Written by Melinda Peer in New York


Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.