The Federal Reserve on Wednesday seized on easing U.S. job losses to voice growing optimism on the economy's prospects, but repeated a vow to keep interest rates unusually low for an extended period.

In a unanimous decision, the U.S. central bank left benchmark overnight rates on hold in a zero to 0.25 percent range, as widely expected.

Underscoring the economy's recovery, the Fed in a post-meeting statement highlighted strides in the battered housing sector and offered a nod to last month's decline in the unemployment rate.

Economic activity has continued to pick up, the Fed said after a two-day meeting. Deterioration in the labor market is abating.

The Fed took note of improving conditions for banks and said it would shutter most of its emergency lending facilities on February 1, the clearest sign yet it was ready to pull back from extraordinary efforts to fight the financial crisis.

The U.S. economy returned to growth in the third quarter, expanding at a 2.8 percent annual rate, signaling the end of the most severe recession since the 1930s.

They recognize growth prospects are brighter, said Anna Piretti, senior economist at BNP Paribas. This is the first step in removing the policy stimulus, but it doesn't mean they are about to raise rates.

Stocks briefly moved higher after the decision as investors welcomed the Fed's nod to a rebounding economy and its low rates pledge. But the gains were fleeting. The price of gold, a traditional inflation hedge, turned sharply lower before retracing some ground.

We are now in a period when the Fed is going to incrementally change the statement in preparation for more significant changes that are probably just on the horizon, said Tom Porcelli, senior economist at RBC Capital Markets in New York.

They are basically picking the low-lying fruit.

UNEASY EXIT

The Fed slashed benchmark interest rates close to zero a year ago and has undertaken a host of emergency measures to pump more than $1 trillion into the economy to combat the worst financial crisis in generations.

With the economy expanding again, investors are wondering when and how quickly the Fed will begin to wind things down. That day of reckoning, dreaded by many in financial markets, appeared a small step closer given the central bank's increasingly upbeat tone.

At the very least, the central bank suggested it does not intend to ramp up monetary easing measures, dropping a reference made back in November to possible future adjustments to its balance sheet.

Still, the Fed made clear it was in no rush to tighten borrowing conditions either, given the nation's jobless problem and the lack of an immediate inflation threat.

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, the central bank said.

A string of recent reports has indicated the economy's recovery may prove stronger than many analysts had expected a few weeks ago.

Industrial production, which fell off a cliff when credit markets seized in late 2008, has started to crawl its way out of the hole. Consumer spending has shown surprising resilience and the pace of job losses has slowed sharply.

With the U.S. unemployment rate at 10 percent, just off a 26-1/2 year high, Fed Chairman Ben Bernanke has come under fire for failing to spot the financial crisis ahead of time and focusing rescue efforts too narrowly on banks.

The Senate Banking Committee is set to vote on Bernanke's nomination for a second term on Thursday. While it is widely expected to recommend the full Senate approve it, many lawmakers have been vocally critical.

On Wednesday, Bernanke earned some reprieve as Time Magazine said it had named him Person of the Year.

(Additional reporting by David Lawder; Editing by Tim Ahmann and Andrew Hay)

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