Fed Leaves Rates Unchanged, Offers Dim View of Economy

Surprising no one, the Federal Reserve on Wednesday left its target for short-term interest rates at essentially zero, saying the economy is not yet strong enough to digest higher borrowing costs.

"Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected," the Fed said in its statement. "Also, recent labor market indicators have been weaker than anticipated."

The decision comes at a time when the economic data suggest the already-fragile recovery may be faltering. Manufacturing and consumer confidence are peeling back, while the two major impediments to a robust recovery -- a soft jobs backdrop and a horrific housing market -- dont appear to be getting any better, and may even be getting worse.

The Fed said that while unemployment remains elevated, and inflation is creeping up, both will look better further on in the year.

The Fed will wrap up its QE2 program at the end of the month.

Later Wednesday, Fed chief Bernanke will hold his second press conference to discuss the nations financial condition and to take questions from the media. Likely topics that will be touched upon include the fragile state of the economic recovery, and the even more fragile state of Greece and the EU.

Bernanke is in the delicate position of trying to grapple with an anemic recovery while at the same time not letting inflation get away from him. The unprecedented printing of dollars through the Feds so-called Quantitative Easing programs has served to dramatically weaken the dollar and more recently has sparked talk of stagflation, the unenviable condition of higher prices in an economy thats not growing. Indeed, an expanding number of economists think the U.S. has already reached that point.

Meanwhile, the government said earlier Wednesday that the nations debt will hit 70% of gross domestic product by the end of this year, which is up from 40% just three years ago and the highest level since around World War II.

The CBO points to "lower tax revenues and higher federal spending related to the recent severe recession" as the cause of the sudden lurch higher. However, the federal debt is not a new concept.

"The growing debt also reflects an imbalance between spending and revenues that predated the recession," the CBO noted. "Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades."

At 2 p.m., the central bank will unveil its updated growth projections for the economy, an outlook that will almost certainly include lowering GDP growth for this year.