THE US FEDERAL Reserve has upgraded its assessment of the US economy, saying activity had picked up after a severe downturn, but renewed its pledge to keep rates exceptionally low for an extended period to support a fragile recovery.

The US central bank also said it would slow purchases of mortgage debt to extend that programme’s life until the end of March in a step toward a measured withdrawal of its extraordinary support for the economy during the downturn.

The Fed, as widely expected, held overnight lending rates at close to zero per cent.

“Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn,” the Fed said in a statement after its two-day policy meeting.

US government bond prices improved on the news that the central bank had reiterated a pledge to keep rates ultra-low for an extended period.

The US central bank also said inflation would remain subdued for some time due to substantial slack in the economy dampening cost pressures, and with stable long-term inflation expectations.

The Fed said it would gradually slow the pace of its purchases of mortgage-related debt in order to promote a smooth transition in markets.

However in a slight tweak of language in its statement, the Fed made clear it would purchase $1.25 trillion of agency mortgage-backed securities. In its August statement the Fed had said it would buy “up to” that amount, but dropped those two words in yesterday’s announcement.

The Fed doubled the size of its balance sheet to more than $2 trillion as it flooded financial markets with money during the crisis last year. _ (Reuters)