New applications for U.S. jobless benefits fell last week and factory activity in the Mid-Atlantic region accelerated in March, suggesting the economy remained on a modest recovery path.

The reports on Thursday, coupled with data showing muted inflation pressures, backed up the Federal Reserve commitment to keep its benchmark interest rate ultra low for a while.

Initial claims for state unemployment benefits fell 5,000 to 457,000 in the week ended March 13, the Labor Department said. Analysts had expected claims to slip to 455,000.

Separately, the Philadelphia Federal Reserve Bank said its business activity index rose to 18.9 in March from 17.6 in February. That was above market expectations for 18.0. A reading above zero indicates expansion in manufacturing.

A second report from the Labor Department showed the Consumer Price Index was unchanged in February after rising 0.2 percent in January. Excluding volatile energy and food prices, the closely watched core measure of consumer inflation inched up 0.1 percent after falling 0.1 percent.

The jobless claims number shows the labor market continues to stabilize; however, there is very little if any price pressure in the U.S., which would allow the Fed to leave interest rates low for some time, said John Doyle, a foreign exchange strategist at Tempus Consulting in Washington.

U.S. stock indexes rose, while U.S. Treasury debt prices were lower. The U.S. dollar drifted higher against the yen.

The claims data covered the survey period for the government's closely watched employment report for March, which will be released April 2.

Analysts expect the economy to show job growth in March, led by temporary hiring for the 2010 census. About 8.4 million jobs have been lost since the start of the recession in December 2007.

Citing a moderate economic recovery and low rates of resource utilization, the U.S. central bank this week renewed a promise to keep its benchmark interest rate exceptionally low for an extended period.

LABOR MARKET STABILIZING

While weekly claims have struggled to post huge declines after falling rapidly in the second half of 2009, other employment indicators suggest the labor market is stabilizing and support views of job growth in the near term.

The Philadelphia Fed's employment index in March rose to its highest level since August 2007. Analysts said weekly claims were likely being kept elevated by job losses in the small business sector.

We assume most of the flow of new layoffs is coming from the small business sector, which remains very depressed both in absolute terms and relative to bigger firms, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

With the labor market still weak, inflation pressures will likely remain muted. While falling energy costs put a lid on consumer prices last month, inflation is trending lower on an annual basis.

Over the past year, core inflation has risen just 1.3 percent. That marks a slowdown from January's 1.6 percent reading and is the lowest since February 2004.

While the economic recovery that started in the second half of 2009 remains on track, there are signs the momentum is slowing.

The Conference Board's index of leading economic indicators -- a gauge of the U.S. economy's prospects -- edged up 0.1 percent in February after a 0.3 percent increase in January.

The indicators point to a slow recovery this summer. Going forward, the big question remains the strength of demand. Without increased consumer demand, job growth will likely be minimal over the next few months, said Ken Goldstein, an economist at the Conference Board.

(Reporting by Lucia Mutikani in Washington; Additional reporting by Burton Frierson and Nick Olivari in New York; Editing by Andrea Ricci)

Manufacturing Inflation Unemployment