Federal Reserve headquarters, Washington DC.

The US Federal Reserve on Wednesday signalled that it expected to keep interest rates near zero for at least six months, but for the first time said what factors could lead to earlier rate rises.

Besides the commitment to keep rates at “exceptionally low levels” for an “extended period” - - understood to mean at least six months - - the central bank said its rates guidance is based on “low rates of resource utilisation, subdued inflation trends and stable inflation expectations.”

"Economic activity has continued to pick up," the Fed's rate setting Federal Open Market Committee (FOMC) said in a statement following a two-day meeting. It noted that consumer spending picked up, housing activity has increased and businesses were retrenching at a slower pace.

FOMC members voted unanimously to maintain their target for the key federal-funds interest rate -- at which banks lend to each other overnight -- near zero.

The FOMC also agreed to cut $25bn off the planned $200bn purchase of debt issued by federal mortgage financiers Fannie Mae and Freddie Mac. The decision was justified on technical grounds reflecting “the limited availability of agency debt”.

The cut is from the Fed’s overall $1.75tn asset purchase programme.

Julia Coronado, BNP Paribas commented: "The more expanded description of the current policy stance is likely a response to debate and speculation that they may be nearing a point where they want to signal a policy tightening is on the horizon.We don’t believe that changing the language was ever on the table, but they are providing clarity on why; the absolute decimation in the labor market implies that many quarters of growth will be required before downward pressures on inflation cease being the predominant risk. In other words, one quarter of 3.5% growth is peanuts given the economic destruction we have seen."

FOMC statement

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that 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. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt.

 The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

CNBC: Insight on the Fed's decision and comments on the economy, with Robert McTeer, former Dallas Fed president; David Kelly, JP Morgan Funds; Jan Hatzius, Goldman Sachs;