Fed holds rates as economy slows; says outlook improving

The Federal Reserve on Wednesday kept interest rates unchanged in the light of an improvement in labour market conditions and a slowing of economic growth. The Fed, however, said US economic outlook has improved and that it would leave the door open to a rate hike in June.

The Federal Open markets Committee at its meeting on Wednesday decided to maintain the target range for the federal funds rate at 0.25 to 0.50 per cent.

''The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 per cent inflation,'' the committee said.

The Fed committee said it would continue with its accommodative policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction until normalization of growth conditions.

Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high.

Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft.

The FOMC cited a range of recent indicators, including strong job gains, which it said, pointed to additional strengthening of the labor market.

Inflation, however, continued to run below the committee's 2 per cent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports.

The FOMC said while the domestic market has improved further despite a recent economic slowdown, global economic headwinds remained on its radar. The committee, however, abstained from making any specific reference in its policy statement to the risks they posed.

"The committee continues to closely monitor inflation indicators and global economic and financial developments," the Fed said.

US stock indices were little changed while bond prices fell, boosting yields. The dollar rallied sharply against the euro and yen before giving back gains.