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Fed holds rates low after economy 'paused'

A police officer guards the Federal Reserve building on September 10, 2011 in Washington, DC
A police officer guards the Federal Reserve building on September 10, 2011 in Washington, DC. The Federal Reserve left its ultra-loose monetary policy unchanged Wednesday, saying the US economy had "paused" in recent months largely due to transitory issue

The Federal Reserve left its ultra-loose monetary policy unchanged Wednesday, saying the US economy had "paused" in recent months largely due to fleeting issues like weather.

The Fed kept its record-low key interest rate between zero and 0.25 percent, as expected, to push down long-term interest rates to boost the economy.

"Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors," the Federal Open Market Committee, wrapping up a two-day meeting, said in a statement.

The Fed said there were signs of improvement in the economy, such as increases in consumer spending and business fixed investment, and recovery in the housing market.

However, it said, "Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook."

The FOMC noted that job growth was rising at a "moderate" pace but the unemployment rate, at 7.8 percent, "remains elevated."

Inflation was trending at or slightly below the Fed's 2.0 percent comfort zone.

The Fed said it would continue its bond and mortgage security purchases, increased from $40 billion to $85 billion a month at the December FOMC meeting, to support a stronger economic recovery

"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability."

The Fed predicted that "with appropriate policy accommodation" the economy would grow "at a moderate pace" and the unemployment rate would "gradually decline".

It reiterated the targets it set in December for tightening monetary policy: if inflation tops 2.5 percent and unemployment falls below 6.5 percent.

"As expected, the FOMC statement was fairly similar in message and tone to the last version, consistent with no second-guessing of the open-ended purchase program," Jim O'Sullivan, chief US economist at High Frequency Economics, said.

Earlier Wednesday the Commerce Department estimated the economy shrank for the first time since the recession in 2009 in the fourth quarter of last year. Much of the 0.1 percent contraction was due to sharp cuts in government defense spending.

The first FOMC meeting of the year saw the rotation in of four new members to the 12-seat committee.

Newcomer Esther George, president of the Kansas City Fed, replaced Richmond Fed chief Jeffrey Lacker as the sole dissenter on policy.

George, dubbed a "hawk" for her tough line on inflation, voted against the FOMC statement, citing concerns that continuing the easy monetary policy raised the risks of future economic and financial imbalances.

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