WASHINGTON, Jan 28 (Reuters) - The U.S. Federal Reserve on Wednesday said it is prepared to buy long-term U.S. government debt if that would help improve conditions in financial markets and signaled some concern that deflation risks were rising.
In a statement issued at the end of a two-day meeting, the central bank's policy-setting panel also said it was holding its target range for overnight interest rates at zero to 0.25 percent -- the level reached in December -- and repeated that it thought rates could stay unusually low for some time.
"The committee ... 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," it said. In December, the Fed had said only that it was studying that option.
The panel voted 8-1 in support of the Fed's decision. Richmond Federal Reserve Bank President Jeffrey Lacker dissented, saying he thought the Fed should immediately move to a program to buy up U.S. government bonds, instead of maintaining its current focus on other asset classes.
With benchmark overnight rates virtually at zero, the Fed has turned its focus to what Chairman Ben Bernanke has dubbed a "credit easing" approach that targets specific assets and markets in the hope of restoring normal lending.
The Fed said it would continue to buy large quantities of morgtage-related debt backed by government-sponsored mortgage enterprises and would expand the quantity and the duration of the program if need be.
It also said it would move ahead with a program to shore up auto, credit card and small business lending to consumers and small businesses. The Fed said it would consider expansions or modifications to any of its lending facilities if necessary to support credit markets.
The central bank is endeavoring to ensure a year-long recession does not lead to a prolonged period of falling prices that could further undermine activity.
"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," it said in a nod to concerns over the risk of deflation. (Reporting by Mark Felsenthal, David Lawder and Emily Kaiser; Editing by Tim Ahmann)