Pointing to signs that "economic activity is leveling out," the Federal Reserve said it would slow down its efforts to pump cash into the economy while leaving interest rates unchanged.

Consumer spending is beginning to stabilize and business inventories are falling, suggesting that a recovery may be around the corner but not yet here, the Fed said in a statement. Despite rising energy prices, weak demand rendered inflation less of a threat, it added.
Even with signs of an economic turnaround beginning to emerge, "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the Fed said, referring to its benchmark interest rate.

The Federal Open Market Committee, led by Fed Chairman Ben Bernanke, was unanimous in the decision to leave rates unchanged.

"They still expect things to stay weak for some time," says David Resler, chief U.S. economist at Nomura Securities. "The Fed is basically looking for positive economic growth for the second half, but not any type of growth that will warrant any change in policy."

With interest rates staying put, the big news in the statement was the Fed's decision to ease back on its plans to buy $300 billion in U.S. Treasury bonds in an effort to stave off a bout of crippling inflation. The central bank now says it will complete the purchases by the end of October, instead of next month.

The shift will help "promote a smooth transition in markets," the Fed said in its statement.

"They're going to slow the rate to achieve the same end without changing the target and allowing the markets to adapt rather than shut it off abruptly," Resler said.

The announcement temporarily put a crimp in an otherwise strong day in the markets. Stocks, which had posted strong gains all day, fell 0.5 percent in the half hour after the Fed's statements before surging in later trading.

DailyFinance senior writer Anthony Massucci contributed to this story.

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