Fed sees signs recession may be easing, keeps rates near zero

— -- The Federal Reserve Wednesday confirmed that the economic free fall of recent months may be ending. But the economy continues to shrink and will remain weak for some time, the nation's central bank said.

After an extended blizzard of aggressive policy steps designed to fight the financial crisis, the Fed opted to leave interest rates unchanged at a rock bottom range of 0% to 0.25%. The Fed also reiterated plans announced last month to buy up to $1.25 trillion in Treasury securities in a bid to ease tight credit markets.

Investors were cheered by the Fed statement and decision not to hold off on further unusual policy steps. "They took very, very aggressive actions at their last meeting. It seems they're happy with what the initial results are," says Greg Salvaggio, senior vice president for capital markets at Tempus Consulting in Washington, D.C.

Still, the economy is far from out of the woods. The Fed's announcement came shortly after the government disclosed that the economy continued to shrink rapidly during the first quarter. Gross domestic product for the first three months of the year fell 6.1%, much more than economists had anticipated.

The unusually sharp decline, coupled with the 6.3% drop in the preceding quarter, marked the economy's worst six-month performance since the Eisenhower administration.

"The economy has continued to contract, though the pace of contraction appears to be somewhat slower," the Fed said.

The economic outlook has "improved modestly" since the March meeting, partly reflecting some easing of strains in financial markets, the Fed said. Even so, "economic activity is likely to remain weak for a time," the Fed added.

Investors shrugged off the continuing economic problems as a hangover from last fall's turmoil following the collapse of Lehman Brothers. In late afternoon trading, the Dow Jones Industrial Average was up almost 175 points.

As the financial crisis deepened over the past year, the Fed has slashed interest rates to near zero and introduced other measures known as "quantitative easing" in a bid to clear blocked credit channels. "The general impression in the market is that some of this stuff is working," said Salvaggio.