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The Federal Open Market Committee warned Wednesday that conditions in the credit markets are `extremely tight,` indicating that conditions have worsened since their December meeting. Voting to keep interest rates unchanged from their target range between zero and 0.25 percent, the Federal suggested that deflation could be a risk.

However, the policymaking branch of the Federal Reserve reiterated their preview statement that the severe recession is likely to keep the federal funds rate at `exceptionally low levels…for some time.`

The economy has weakened since the December meeting, the FOMC said. While consumers have cutback spending in the face of steep declines in industrial production, housing starts, and employment, there has been some sign of improvement in the financial markets as a result of government liquidity efforts, the Fed noted.

Overall, the FOMC anticipates that there will be a `gradual recovery` in economic activity later this year, although they noted that `the downside risks to that outlook are significant.`

There is a risk of deflation, the Federal Reserve noted, in light of the decline in energy and commodity prices.

`In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters,` the FOMC statement read. `Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.`

However, the Federal Reserve reiterated its commitment its dual mandate, `the resumption of sustainable economic growth and to preserve price stability.`

Returning to sustainable growth will likely require more intervention, the Fed wrote, noting that market operations and efforts to stimulate the economy will likely keep the Federal Reserve`s balance sheet at a high level. At the end of 2008 it had more than doubled since September, ballooning from $900 billion to over $2 trillion.

`The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant,` the FOMC statement read. `The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.`

The vote for FOMC monetary policy action was not unanimous, with one dissenting vote from Richmond Federal Reserve Bank President Jeffrey Lacker. Lacker preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.