By Pedro da Costa and Mark Felsenthal
WASHINGTON (Reuters) - The Federal Reserve on Wednesday voiced growing optimism on the U.S. economy as job losses slow, but repeated a vow to keep interest rates unusually low for "an extended period."
In a unanimous decision, the U.S. central bank left benchmark overnight rates on hold in a zero to 0.25 percent range, as widely expected.
Underscoring the economy's recovery, the Fed in a post-meeting statement highlighted improvement in the battered housing sector and noted last month's decline in the unemployment rate.
"Economic activity has continued to pick up," the Fed said at the conclusion of a two-day meeting. "Deterioration in the labor market is abating."
Underscoring improving conditions for banks, the Fed said it would stand by plans to shutter most of its emergency lending facilities on February 1, showing growing confidence that credit markets could stand on their own.
The U.S. economy returned to growth in the third quarter, expanding at a 2.8 percent annual rate, signaling the end of the most severe recession since the 1930s.
"They recognize growth prospects are brighter," said Anna Piretti, senior economist at BNP Paribas. "This is the first step in removing the policy stimulus, but it doesn't mean they are about to raise rates."
U.S. stocks briefly moved higher after the decision as investors welcomed the Fed's acknowledgment of a rebounding economy, but the gains proved fleeting in a nervous market. Stocks, bonds and the U.S. dollar ended the day little changed.
"We are now in a period when the Fed is going to incrementally change the statement in preparation for more significant changes that are probably just on the horizon," said Tom Porcelli, senior economist at RBC Capital Markets in New York. "They are basically picking the low-lying fruit."
The Fed cut benchmark interest rates close to zero a year ago and has undertaken a host of emergency measures to pump more than $1 trillion into the economy to combat the worst financial crisis in generations.
In November, the Fed said it would make adjustments to its lending facilities as warranted, holding open the possibility they could be ramped up if needed. It dropped that phrase on Wednesday.
With the economy expanding, investors are wondering when and how quickly the Fed will begin to wind down its monetary support. That day of reckoning, dreaded by many in financial markets, appeared a small step closer, given the central bank's increasingly upbeat tone.
A string of recent reports has shown the recovery gathering strength. Industrial production and consumer spending, which slumped when credit markets seized in late 2008, are on the rise, and the pace of job losses has slowed sharply.
Still, the Fed made clear it was in no rush to tighten borrowing conditions either, given the lack of an immediate inflation threat in the face of high unemployment.
In November, the jobless rate edged down to 10 percent, just off a 26-1/2 year high, but Fed officials expect it to remain above 9 percent at least through the end of next year.
Inflation, meanwhile, seems largely contained. The Labor Department said on Wednesday consumer prices rose 0.4 percent in November, pushing the 12-month gain into positive territory for the first time since February. But prices outside of food and energy were flat on the month.
"Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the central bank said.
With the unemployment rate in double digits, Fed Chairman Ben Bernanke has come under fire for failing to spot the financial crisis ahead of time and focusing rescue efforts too narrowly on banks.
The Senate Banking Committee is set to vote on Bernanke's nomination for a second term on Thursday. While it is widely expected to recommend the full Senate approve it, many lawmakers have been vocally critical.
On Wednesday, Bernanke earned some reprieve as Time Magazine said it had named him "Person of the Year." For