Conditions in the US labour market seem to be improving graudually, and recovery in the economy was on "firmer footing" than previously thought, said the Federal Open Market Committee (FOMC).

The market, at its monetary policy meeting Tuesday, had expected the US Federal Reserve to keep its official interest rate zero and and 0.25 per cent - which it did.

Also, there was no change in the Fed's plan to keep liquidity plentiful by buying up to US$600 billion in Treasury bonds by the second quarter of this year - a program known as quatiative easing part 2 (QE2).

Traders and economists were surprised at the optimism in the Fed's views on the strength of the economic recovery, and analysts say that QE2 may not need to be extended if the recovery continues at its current pace.

"If that recovery is panning out as expected it certainly gives the central bank a bit more room to maneuver in that they can perhaps let QE2 expire at the end of the middle of the year, and then go back to a more normal monetary condition and normal monetary policy management," said regional exonomist for CIMB, Mr Song Seng Wun.

Analysts were also surprised to find no mention in the FOMC statement of any risks to the global economy from the earthquake and tsunami in Japan.

"It's an interesting thing to note that the FOMC statement did not actually mention Japan, but pointed to insipient signs of recovery within the US economy, so that's a sign that I don't think its assessment is that the disruption from the earthquake will be a game changer for now, " said Mr Leong Wai Ho, senior regional economist for Barclays Capital.

Analysts also point to oil prices, which have eased following the Japan disaster.

Lower energy prices, they say, will give the Fed more breathing room to continue its super loose monetary policy without stoking inflation.

channelnewsasia.com