WASHINGTON (AP) - The Federal Reserve signaled Wednesday that
the weak economy likely will keep prices in check despite growing
concerns that the trillions it's pumping into the financial system
will ignite inflation.

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
pledged again to keep it there for "an extended period" to help
brace activity going forward.

Even though energy and other commodity prices have risen
recently, the Fed said inflation will remain "subdued for some
time." This new language sought to ease Wall Street's concerns
that the Fed's aggressive actions to revive the economy will spur
inflation later on.

The Fed also decided to maintain existing programs intended to
drive down rates on mortgages and other consumer debt. Instead, the
central bank again reserved the right to make changes if economic
conditions warrant.

The Fed in March launched a $1.2 trillion effort to drive down
interest rates to try to revive lending and get Americans to spend
more freely again. It said it would spend up to $300 billion to buy
long-term government bonds over six months and boost its purchases
of mortgage securities. So far, the Fed has bought about $177.5
billion in Treasury bonds.

The Fed is on track to buy up to $1.25 trillion worth of
securities issued by Fannie Mae and Freddie Mac by the end of this
year. Nearly $456 billion worth of those securities have been
purchased.

Fed policymakers noted that the "pace of economic contraction
is slowing" and that conditions in financial markets have
"generally improved in recent months." That observation about the
recession was stronger than after the Fed's last meeting in April.

Economists predict the economy is sinking in the April-June
quarter but not nearly as much as it had in the prior six months,
which marked the worst performance in 50 years. The economy is
contracting at a pace of between 1 and 3 percent, according to
various projections.

Fed policymakers said its forceful actions, along with President
Barack Obama's stimulus of tax cuts and increased government
spending will contribution to a "gradual "return to economic
growth.

Bernanke has predicted the recession will end later this year.
Some analysts say the economy will start growing again as soon as
the July-September quarter.

Fed policymakers noted that consumer spending has shown signs of
stabilizing but remains constrained by ongoing job losses, falling
home values and hard-to-get credit.

Even after the recession ends, the recovery is likely to be
tepid, which will push unemployment higher.

The nation's unemployment rate - now at 9.4 percent - is
expected to keep climbing into 2010. Acknowledging that the jobless
rate is going to climb over 10 percent, President Barack Obama said
Tuesday he's not satisfied with the progress his administration has
made on the economy. He defended his recovery package but said the
aid must get out faster.

Some analysts say the rate could rise as high as 11 percent by
the next summer before it starts to decline. The highest rate since
World War II was 10.8 percent at the end of 1982.

The weak economy has put a damper on inflation.

Consumer prices inched up 0.1 percent in May, but are down 1.3
percent over the last 12 months, the weakest annual showing since
the 1950s. The Fed suggested companies won't be in any position to
jack up prices given cautious consumers, big production cuts at
factories and the weak employment climate.

(Copyright 2009 by The Associated Press. All Rights Reserved.)