Fed Stands Pat on Rates as European Debt Crisis Weighs on Recovery

As expected, the Federal Reserve kept short-term interest rates unchanged at near-zero Wednesday and didn't waver from it pledge to keep them at exceptionally low levels for an "extended period," citing concerns about the European debt crisis.

Wrapping up two days of meeting, the Federal Open Market Committee said economic recovery is proceeding and the labor market is improving gradually, but the financial crisis on the Continent is undermining an already moderate pace of growth.

"Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," the Fed said in a statement. "Bank lending has continued to contract in recent months."

Household spending is growing but remains hampered by high unemployment, modest income growth, lower housing wealth, and tight credit, the Fed said.

Business spending has grown significantly, the Fed added, but employers are still reluctant to add to payrolls and the housing market remains soft. Earlier on Wednesday the Commerce Department said new-home sales plunged 33% to a record low in May.

Thomas Hoenig, president of the Kansas City Federal Reserve Bank, was once again the lone dissenter. Hoeing has dissented with every Fed statement this year.