The Federal Reserve acknowledged a faltering pace of U.S. economic recovery on Wednesday as it renewed its vow to hold benchmark interest rates exceptionally low for an extended period.

KEY POINTS: * In a statement, the Fed scaled back its assessment of the pace of recovery, taking note of pockets of weakness, and also issued a cautionary note about volatile financial markets in light of Europe's debt woes. * As expected, the Fed held overnight rates in the zero to 0.25 percent range set in December 2008 as the central bank fought the deep recession and virulent financial crisis. * Kansas City Federal Reserve Bank President Thomas Hoenig dissented for the fourth meeting in a row.

COMMENTS:

LARRY DYER, U.S. INTEREST RATE STRATEGIST, HSBC SECURITIES, NEW YORK

To the extent that they did a word change they went more dovish. The value of Treasuries depends both on the economic outlook and what's already priced into the Treasury market. This supports lower Treasury yields, but in the past few months we've had the two-year note yield drop from north of 1 percent to 68 basis points, and we've had the 10-year note yield drop from nearly 4 percent. So we should have a pretty muted reaction to the statement.

KEITH SPRINGER, PRESIDENT, CAPITAL FINANCIAL ADVISORY SERVICES, SACRAMENTO, CALIFORNIA:

The FOMC statement didn't say anything out of the ordinary and this is the problem. The problem is that they are not fighting this like a war... Instead of saying they will keep low rates for a extended period of time, they need to get more aggressive in their language in order to combat deflation or any negative economic cycle that we are in.

DAN COOK, SENIOR MARKET ANALYST, IG MARKETS, CHICAGO:

It didn't have market impact, though overall there was definitely a more negative tone. The Fed doesn't have a great outlook, but that wasn't totally unexpected with the housing and labor market data we've seen lately.

The housing data this morning was probably the worst since Jamestown was founded, though that was probably offset by the spike we saw before that. There's just no demand for new housing, and any demand we did have was kept alive through stimulus and tax measures.

The overall shape of the market and the economy, which the Fed highlighted, probably has a demand fixture for oil that isn't a great outlook. We just saw inventories jump, and its going to be a drawn out recovery and a while before we start seeing demand for oil pick up again. Manufacturing is tough right now and there's trouble across the board. Oil will remain volatile.

RICHARD DEKASER, PRESIDENT, WOODLEY PARK RESEARCH, WASHINGTON:

There was nothing surprising in this whatsoever regarding to its policy stand. With its current assessment, there is a clear downgrade on the Fed's view on economic conditions.

The Fed is saying inflationary pressure is nil, and growth is preceding rather than strengthening.

The fair inference is that there is no urgency whatsoever to increase the feds rate or other tightening actions.

PETER BOOCKVAR, EQUITY STRATEGIST, MILLER TABAK & CO, NEW YORK

Just when one thought the FOMC couldn't get more dovish, they get more dovish, specifically on inflation. They toned down the outlook by saying the 'economic recovery is proceeding' vs 'economic activity has continued to strengthen' in April. They referred to the improvement in the labor market as gradual. They took out 'housing starts have edged up' out of the statement as they should and they also implicitly referred to Europe by saying 'financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.' On inflation, they referred to the drop in energy and other commodities as helping to lower the trend of inflation. Of course in April when copper was at $3.65 and oil was at $90, the FOMC didn't mention the upside risks to inflation, thus the very dovish commentary. Rates will stay 'exceptionally low' for a very, very, very, very long time.

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:

In early May a substantial minority of analysts were looking for the Fed to alter the language on extended period in June to prepare for an August rate hike. All that has gone out the window. The Fed did not change the phrase extended period.

However, they gave two very large hints that they were even less inclined to hike rates anytime soon. First they downgraded their assessment of current economic conditions regarding housing and the labor market. And second they admitted that financial conditions were less supportive of growth mainly due to developments abroad.

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR & ASSOCIATES, TORONTO, CANADA:

If you look at change in central bank policy versus politics, right now for the market central bank policy change is less likely, and the Fed underscored that by talking about the U.S. economy being weak and real estate and jobs being weak as well as external situations, which probably means Europe.

How the U.S. handles the issue of deficit reduction versus stimulus is going to be important.

STUART HOFFMAN, CHIEF ECONOMIST, PNC FINANCIAL SERVICES GROUP, PITTSBURGH:

It was pretty much as expected. Certainly they maintained the 'extended period' and their view that inflation is going to remain low for quite a while.

In terms of talking about the economy they did tone it down a little bit and the biggest change was noting financial conditions -- no doubt reflecting the sovereign debt issues in Europe and the effect it has had on global financial markets -- were less supportive of economic recovery. That is certainly the acknowledgment of the stock market decline and the nervousness we have seen in the financial markets. That only reinforces their decision to hang on to this funds rate for an extended period.

JIM AWAD, MANAGING DIRECTOR, ZEPHYR MANAGEMENT, NEW YORK;

It's a repeat of the last release, it means that in spite of several reasonable economic reports the Fed has not increased its confidence about the magnitude and durability of the recovery.

The markets will interpret it as more of the same, it won't move the market, and they'll immediately move to second quarter earnings and third quarter outlooks.

The market was looking to see if the fed had increased confidence in the economy, and that wasn't the case, so it will be viewed as a non-event.

JOHN BRADY, SENIOR VICE PRESIDENT, MF GLOBAL, CHICAGO

The statement is a little more dovish than the markets expected. Indexes were trying to creep higher to unchanged, but the tone and structure of the statement suggested a little more downside to the economy than upside.

The housing data this morning was awful, though I don't want to read one month as a trend. It does suggest that we're not seeing a vivacious rebound in housing, though, and outside of surveys, all the housing data we've seen has been awful. It all points to perhaps a double dip recession.

The reason homebuilders are up today is probably a buy-the- rumor, sell-the-news type thing, and also because there could be a new homebuyers' tax credit because of the data.

LAWRENCE GLAZER, MANAGING PARTNER OF MAYFLOWER ADVISORS IN BOSTON:

If you look at this from a bond market perspective, the bond market had it right in the sense (of) the direction Treasury yields have been headed in.

Today's Fed statement supports that move. The lack of a positive economic outlook is going to support the extremely low Treasury yields that we have been seeing.

MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST, BNY MELLON, NEW YORK:

It's dovish. There's no rate hike expected for the foreseeable future. At least not until the end of the year, if not 2011. The Fed is concerned about threats to growth, not threats to inflation. That's a formula for staying on hold indefinitely. The longer the Fed keeps kicking the can down the road, the less positive this is for the U.S. dollar outlook.

BRUCE BITTLES, CHIEF INVESTMENT STRATEGIST, ROBERT W. BAIRD & CO, NASHVILLE, TENNESSEE:

No surprises. The economy appears to be slowing with no inflationary pressures. The Fed said it'll keep rates low for an extended period of time, so nothing new. This won't have much of an impact on trading, and if anything it could have a negative impact because it shows the economy isn't improving much. Housing is where the problem is right now. The data this morning looks like there could be a potential double dip in housing. That would be a strong headwind for the economy in general.

JOHN DOYLE, FOREIGN EXCHANGE STRATEGIST, TEMPUS CONSULTING, WASHINGTON:

No surprises. We believe that with the reeling housing market paired with slow job creation, the Fed will continue this language and continue to support the economy throughout the rest of the summer. The dollar overall will continue to trade with the prevailing risk sentiment, with the euro debt crisis dominating that direction.

MARKET REACTION: STOCKS: U.S. stock indexes added to declines BONDS: U.S. Treasury debt prices held gains DOLLAR: U.S. dollar cut losses against the euro

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