UPDATE 6-Fed renews vow to keep rates low, with a dissent

* Fed repeats pledge of low rates for extended period

* Kansas City Fed President Thomas Hoenig dissents

* Overnight rates unchanged near zero; MBS program to end

* Fed sees economic recovery “moderate” for a time
(Adds details, background, rewrites throughout)

By Emily Kaiser and Pedro da Costa

WASHINGTON, Jan 27 (BestGrowthStock) – The Federal Reserve on
Wednesday offered a guardedly upbeat view of the U.S. economy
and renewed its pledge to keep interest rates near zero despite
the objection of one policy maker.

The decision to hold rates steady by the Fed’s
policy-setting Open Market Committee was 9-1, with Kansas City
Federal Reserve Bank President Thomas Hoenig dissenting because
he wanted the central bank to eliminate a phrase vowing to keep
rates exceptionally low for “an extended period.”

The FOMC statement (Read more about the Fed’s FOMC) reflected a somewhat brighter tone than
previously and appeared to put more faith in the sustainability
of a nascent economic rebound.

“Economic activity has continued to strengthen,” the panel
said after a two-day meeting, a slight upgrade from a December
statement that said activity had “continued to pick up.”

It also described the pace of economic recovery as likely
to be “moderate for a time,” having previously depicted the
recovery as “likely to remain weak.”

“This is as close an admission that we are likely to see
that the FOMC thinks the recession is over and the economy is
on a self-sustaining recovery path,” said Chris Rupkey, senior
financial economist at Bank of Tokyo-Mitsubishi.

Tempering its optimism, the Fed removed a reference to an
improving housing market after the latest batch of figures
revealed a new round of weakness in the sector. Still, the Fed
said it will allow its $1.43 trillion program of mortgage
linked-debt purchases to expire as planned at the end of
March.

The U.S. dollar extended gains after the Fed’s decision,
pushing the euro below $1.40 for the first time since July as
investors interpreted Hoenig’s dissent as bringing the central
bank one step closer to tightening monetary policy. Stocks
initially moved lower but then recovered to end higher, while
Treasury bond prices dipped.

In what appeared to be a nod to its hawkish members, the
Fed sounded less certain about the prospects for low inflation.
Rather than saying price growth “will” remain subdued, it said
simply that it “is likely” to do so.

In a Reuters poll of primary dealers, nine of 15
respondents said they expect the Fed to start raising rates
this year and 13 dealers said they expect the Fed to stick to
its plans to end purchases of mortgage-backed securities by
March. For details on the poll, click on [ID:nNAT007257].

POLITICAL CLOUDS

In an effort to stem the worst financial crisis in
generations and combat a deep recession, the U.S. central bank
not only slashed interest rates but undertook a series of
emergency actions to soothe ailing credit markets.

Many of these actions, including bailouts of insurer
American International Group Inc (AIG.N: ) and other financial
giants, have fueled taxpayer anger, endangering Fed Chairman
Ben Bernanke’s nomination to a second term at the central
bank.

Once expected to sail through, his confirmation vote ran
into resistance last week, sending Wall Street, which strongly
backs the chairman, sharply lower on Friday.

Financial markets, which took a drubbing last week, have
stabilized as Bernanke’s confirmation began looking more
certain. The latest Reuters tally showed 50 out of 100 senators
were likely to vote for Bernanke, while 22 vowed to vote
against him, citing public anger over bank bailouts and the
financial crisis. The remaining senators were undecided.

The Senate will take up the nomination on Thursday. For
more see [ID:nN2699162].

CLOSING UP SHOP

The Fed reiterated that it was shuttering an array of
emergency lending programs on Feb. 1 and said its dollar swap
arrangements with overseas central banks would also end on that
date. [ID:nN27156683] It also announced a firm date to end a
program for banks to obtain short-term loans.

The economy resumed growing in the third quarter and most
economists think it expanded at a rapid clip in the final three
months of 2009.

However, with the unemployment rate at 10 percent, consumer
spending is likely to remain subdued. The housing market, which
was at the root of the recession that began in December 2007,
has also shown signs of weakness lately.

Figures earlier on Wednesday showed sales of new homes fell
unexpectedly in December. That came on the heels of another
report that showed a steep drop in sales of existing homes.

Stock Market Report

[ID:nN27177942]

UPDATE 6-Fed renews vow to keep rates low, with a dissent