The Federal Reserve on Wednesday said the pace of economic recovery was proceeding more slowly than it had expected though it was primarily because of temporary factors.

The Fed's policy setting committee said it will maintain interest rates at exceptionally low levels for an extended period.

It said inflation has picked up because of higher commodity prices and supply chain disruptions but longer-term inflation expectations remain stable.

The slower pace of recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply-chain disruptions associated with the tragic events in Japan, the Fed said in a statement at the conclusion of a two-day meeting.

The Fed said it was ending its Treasury purchase program at the end of the month as planned but will continue to reinvest principal payments from its holdings.

Two years after the end of the U.S. recession and unprecedented attempts by the Fed to boost growth, the recovery looks disappointingly weak.

While Fed officials have persistently said they expect growth to accelerate, reports since the Fed's April meeting point to a loss of momentum in the world's largest economy.

Employers have been reluctant to hire and the jobless rate remains stubbornly high, climbing to 9.1 percent in May. Housing -- a central component of most U.S. families' wealth -- remains mired in a deep slump.

With jobs uncertain and home values falling, consumer spending, which makes up around 70 percent of U.S. GDP, has lagged. Retail sales declined in May for the first time in 11 months.

Factory activity has been sluggish as well.

The economy grew at just a 1.8 percent annualized rate in the first three months of the year. Analysts expect growth in the second quarter to log a rate of around 2 percent, still not sufficient to generate a big uptick in hiring.

The Fed in April forecast the economy would grow between 3.1 percent and 3.3 percent in 2011 and 3.5 percent to 4.2 percent next year. It releases fresh forecasts later on Wednesday.

Even as growth has flagged, inflation has accelerated. Consumers prices posted their biggest year-on-year gain since October 2008 last month, and so-called core prices that exclude food and energy costs have also picked up.

Fed Chairman Ben Bernanke argued in a speech two weeks ago that some of the obstacles to growth -- such as disruptions from Japan's earthquake and tsunami and high gasoline prices -- are likely to diminish in coming months, enabling the economy to grow more solidly in the second half of the year.

The Fed cut interest rates to near zero in December 2008 and is on track to buy $2.3 trillion worth of longer-term securities by the end of June to stimulate economic growth. The latest buying program -- purchases of $600 billion worth of Treasuries that is dubbed QE2 because it is the second round of what economists call quantitative easing -- ends June 30.

Analysts have in recent weeks speculated the Fed may begin to consider what other tools it has to spur economic growth. Possible steps could include further asset purchases, or a bolstering of promises to markets that easy money policies will be in place until there are clear signs the recovery is taking off.

(Editing by Andrea Ricci)

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