Fed holds interest rate as US recovery limps

"The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee expected," the policy-setting Federal Open Market Committee said after a two-day meeting.

But the slowdown was mainly due to factors that probably would be temporary such as higher energy prices, it said.

The central bank unanimously decided to keep its key target interest rate between zero and 0.25 percent where it has been since December 2008 in an effort to boost economic growth.

For the 22nd consecutive meeting, Fed policymakers said the rate would likely remain exceptionally low "for an extended period."

Since its last meeting in April, economic conditions had unexpectedly deteriorated, the Fed said, but highlighted the negative factors would be fleeting.

"Recent labor market indicators have been weaker than anticipated," the Fed committee said, noting the unemployment rate hit 9.1 percent in May.

"The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan."

A recent pickup in inflation was mainly due to higher prices for some commodities and imported goods, as well as the recent supply chain disruptions from the Japan tsunami and nuclear disaster, the central bank said.

"However, longer-term inflation expectations have remained stable," said the Fed, whose dual mandate is to foster maximum employment and price stability.

The Fed maintained an optimistic tone on the economic outlook, predicting the lackluster recovery would gather steam and the elevated jobless rate would slowly fall.

"The committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the committee judges to be consistent with its dual mandate."

The Fed on Wednesday also said it would allow its $600 second round of bond buying, or quantitative easing, dubbed QE2, to expire as scheduled June 30.

Last November the central bank was forced to abort its first effort to freeze stimulus spending and instead launched QE2 as fears grew that the world\'s largest economy could suffer a double-dip recession.

The Fed also announced it would continue its existing policy of reinvesting principal payments from its securities holdings.

With its key monetary tool at a rock-bottom rate, the Fed has spent more than $2 trillion on mortgage securities and other assets to boost economic growth since the crisis began.

The Fed is scheduled to publish quarterly US economic projections at 1800 GMT, followed by a news conference by Fed chairman Ben Bernanke.

© Copyright AFP Agence France-Presse GmbH - All rights reserved. This material may not be published, broadcast, rewritten or distributed. All reproduction or redistribution is expressly forbidden without the prior written agreement of AFP.