Fed holds interest rates at record lows

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WASHINGTON, D.C. — The Federal Reserve on Tuesday repeated its pledge to hold interest rates at record lows to foster the economic recovery and ease high unemployment.

But the Fed’s assessment of the economy was a bit more upbeat. It said the job market is stabilizing.

That was an improvement from its January statement, when it said the deterioration in the labor market was abating.

It also said business spending on equipment and software has risen significantly, also an upgrade from its last assessment. Still, the Fed cautioned that spending by consumers could be dampened by high unemployment, sluggish income growth, lower wealth and tight credit.

The Fed’s decision to retain its pledge to keep rates at record lows for an “extended period” pleased investors. The Dow Jones industrial average gained about 30 points. Before the announcement, it was up by single digits.

Prices for Treasurys rose slightly. The yield on the benchmark 10-year Treasury fell to 3.66 percent from 3.68 percent just before the announcement.

The Fed made no changes to a program to drive down mortgage rates and bolster the housing market, even as a government report Tuesday showed housing construction tumbling in February.

Under that program, the Fed is scheduled to end its mortgage-securities purchases from Fannie Mae and Freddie Mac at the end of this month. Some analysts fear that once the program ends, mortgage rates could rise. That could weaken the recovery in housing and the overall economy. The Fed has left the door open to extending the program if the economy weakens.

Its decision to keep rates at record lows for an “extended period” again drew one dissent. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, for a second straight meeting opposed keeping the yearlong pledge.

Hoenig’s dissent illustrates the Fed’s challenge in deciding when to signal that higher rates are coming.

Hoenig thinks the economy is strong enough for the Fed to telegraph that rates will rise soon to prevent inflation.

But Fed Chairman Ben Bernanke and other colleagues think the low rates will continue to be needed to feed the economic recovery.