Fed is Upbeat on Economy, Keeps Rates Low

By Jeannine Aversa, AP Economics Writer

WASHINGTON (AP) — The Federal Reserve sounded a more confident note Wednesday that the economy is strengthening but pledged to hold rates at record lows to make sure it gains traction.

Wrapping up a two-day meeting, the Fed in a 9-1 decision retained its pledge to hold rates at historic lows for an "extended period." Doing so will help energize the recovery.

The Fed offered a more upbeat view of the economy even as it noted that risks remain. It said the job market is "beginning to improve," an upgrade from its last meeting in mid-March. It observed then that the unemployment situation was merely "stabilizing."

The Fed also noted that consumer spending has "picked up," an improvement from its last observation that spending was expanding at a "moderate pace."

Even with the economic gains, the Fed noted reasons to be cautious. High unemployment, sluggish income gains and tight credit are still dampening consumer spending, a major contributor to economic activity. Commercial real estate remains fragile. And though housing activity has edged up, it is still at depressed levels. Bank lending continues to shrink.

The Fed's statement included nothing that would lead most economists to move up their forecasts for when the central bank will start raising rates. The soonest the Fed will do so is the fourth quarter, 34 of 44 leading economists polled told The Associated Press in a recent survey.

"The Fed did upgrade its assessment of the economy, but clearly there is too much headwind for the recovery" for the Fed to signal any plans to boost rates, said Sung Won Sohn, economist at California State University.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for the third straight meeting was the sole member to dissent from the Fed's decision to retain the "extended period" pledge.

Hoenig has said he fears keeping rates too low for too long could lead to excessive risk-taking by investors, feeding new speculative bubbles in the prices of stocks, bonds and commodities.

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