The Associated Press

WASHINGTON - The Federal Reserve kept a key interest rate at a 45-year low Tuesday and repeated its pledge to keep rates at rock-bottom levels for a "considerable period."

The action triggered a broad rally on Wall Street as investors were bolstered by the Fed's assurances that the central bank is determined to hold down rates for as long as it takes to engineer a sustained economic rebound.

The Dow Jones Industrial Average closed the day up 118.53 points at 9567.34 with the broader market showing strong gains as well.

"Fed officials are saying that despite an improved economic outlook, they are not going to be raising interest rates anytime soon, so the markets can relax," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Many analysts predicted that the Fed would keep rates at the current level for as long as a year, in part because of lingering worries that inflation has fallen to such low levels that the bigger risk right now is a destabilizing fall in prices rather than any threat of higher inflation.

The Fed last changed rates in June when it pushed its target for the federal funds rate, the interest that banks charge each other on overnight loans, down by a quarter-point to 1 percent. It was the Fed's 13th rate cut since early 2000 and brought its key policy lever to the lowest level since July 1958.

At the following meeting Aug. 12, the Fed left rates unchanged but said for the first time that it was prepared to leave rates at low levels "for a considerable period," language it repeated Tuesday.

Analysts said the central bank was achieving success in correcting botched signals earlier this year when the Fed's worries about the remote threat of deflation misled bond investors into thinking the central bank was prepared to cut rates even faster and to employ unconventional methods such as direct purchases of long-term bonds in an effort to lower rates.

Treasury's benchmark 10-year note fell to a more-than-four-decade low of 3.1 percent in mid-June before jumping to 4.6 percent in August, raising concerns that a too-rapid rise in long-term rates could abort the current recovery.

However, the central bank's assurances in August and this month that it will keep rates low for a considerable period seemed to be convincing bond traders. In recent days, the 10-year Treasury note has retreated and is trading below 4.3 percent.

The central bank specifically stated Tuesday that it was concerned about recent "weakening" in the labor market.

Businesses cut payrolls for a seventh consecutive month in August, bringing total job losses to nearly a half-million. For the last two weeks, initial claims for unemployment benefits have climbed back above the 400,000 mark.

President Bush, who will be running for re-election next year, pushed through a third round of tax cuts this summer in an effort to counter Democratic attacks that his record on job growth is the worst of any president since Herbert Hoover.

By specifically mentioning the poor jobs performance, the central bank is sending a message that it, too, is worried about the economy's inability to generate strong enough growth to put a dent in unemployment, analysts said.

"Even though the Fed tries to be independent of the political situation, Fed officials know that they will be in the hot seat next year along with the administration if they can't start bringing the unemployment rate down," said David Jones, head of DJM Advisors, a Denver-based economic consulting firm.

"Chairman (Alan) Greenspan got one President Bush mad at him, so he would prefer to stay on good terms with the current president," said Diane Swonk, chief economist at Bank One in Chicago.

Bush's father blamed Greenspan's interest rate policies for dampening economic growth in 1992, the year he lost the White House to Bill Clinton.

Fed statement

Text of the Federal Reserve statement on interest rates issued Tuesday:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.

The committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that spending is firming, although the labor market has been weakening. Business pricing power and increases in core consumer prices remain muted.

The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level.

The committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the committee believes that policy accommodation can be maintained for a considerable period.

Voting for the FOMC monetary policy action were: Alan Greenspan, chairman; Ben S. Bernanke; Susan S. Bies; J. Alfred Broaddus Jr.; Roger W. Ferguson Jr.; Edward M. Gramlich; Jack Guynn; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Robert T. Parry; and Jamie B. Stewart Jr.

The Associated Press