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Fed sees recession easing, inflation subdued

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The Federal Reserve signaled Wednesday that the weak economy likely will keep prices in check despite growing concern that the trillions it’s pumping into the financial system will ignite inflation, according to an Associated Press report.

Fed Chairman Ben Bernanke and his colleagues held a key bank lending rate at a record low of between zero and 0.25 percent. And they pledged again to keep it there for “an extended period” to help brace the economy.

Fed policy-makers also dropped language they had used in a statement at their last meeting in April that the weak economy could trigger deflation.

And they offered no new assurances that they would step up their purchases of government bonds and mortgage securities to try to drive down interest rates on consumer debt. That rattled bond investors, who fear the prospect of higher rates. So did the Fed’s observation that commodity prices are rising.

The mention of higher prices hit the Treasury securities market because the value of returns on fixed-income investments can erode quickly if inflation occurs. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.69 percent from 3.63 percent Tuesday. Stock prices also fell after the Fed’s announcement.

Still, the Fed said, inflation will remain “subdued for some time.” And overall, Fed policy-makers delivered a slightly more encouraging assessment of the economy.

“The Fed is sending the message that the economy is making progress toward a path of recovery, that the credit markets appear to be healing and inflation is not going to be a problem,” said economist Lynn Reaser, vice president of the National Association for Business Economics. “The bogeyman of deflation also was removed from the Fed’s primary risk list,” she said.

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