The economy continues to "pick up" as housing rebounds and consumer spending shows signs of reviving, the Federal Reserve said Wednesday. But with the recovery just under way, the central bank again said it'll keep interest rates extremely low for an "extended" period.

Other reports Wednesday showed that U.S. companies reduced jobs at a slower pace in October, suggesting some labor market stabilization. Meanwhile, the service sector's modest expansion cooled a bit in October.

The Fed voted 10-0 to leave interest rates at a record-low 0%-0.25% to keep credit flowing, even though the economy expanded at a 3.5% annual rate in the July-September quarter after contracting for four straight quarters.

"Economic activity has continued to pick up," the central bank said in its post-meeting statement. "Activity in the housing sector has increased over recent months" and "household spending appears to be expanding."

But the Fed noted that the economy is "likely to remain weak for a time" as consumers suffer from job losses, weak income growth, lower housing wealth and tight credit.

So policymakers reaffirmed their pledge to keep rates low for an "extended" time. But they said they will trim buys of debt from government-sponsored agencies such as mortgage lenders Freddie Mac (NYSE:FRE - News) and Fannie Mae (NYSE:FNM - News) by $25 billion to $175 billion. The Fed said the decision reflected "the limited availability of agency debt."

The $175 billion in debt purchases and a separate program to buy $1.25 trillion in mortgage securities are set to end next spring.

The 10-year Treasury yield rose 5 basis points to 3.53%. Analysts said traders fear a "dovish" Fed will keep rates too low for too long, letting inflation to take hold.

"The longer the Fed sustains its zero interest rate policy the more people will be concerned about inflation expectations long-term," said John Miller, chief investment officer at Nuveen Investments.

Stocks, up most of the day, sold off in the final minutes. The Dow closed up 0.3% and the S&P 500 0.1%. But the Nasdaq fell 0.1%.

Also Wednesday, ADP said private firms shed 203,000 jobs in October, the smallest decline since July 2008and the 7th straight monthly drop.

A separate report showed firms declared plans last month to lay off 55,679 workers, a 19-month low.

On Friday, the Labor Department is expected to report that payrolls shrank by 175,000 in October vs. a 263,000 decline in September. Unemployment likely edged up to 9.9%, a 26-year high.

The Fed said businesses were trimming investment and staff at a slower pace and making progress in bringing inventories in line with sales. But economists don't see job growth until 2010.

On Wednesday, the Institute for Supply Management's index of non-manufacturing activity unexpectedly fell last month, dipping 0.3 point 15 50.6 and below the expected 51.5. It did hold above the neutral 50 for a second month. And the new orders gauge grew at the fastest rate since the recession began. But the jobs gauge fell.

By contrast, ISM's manufacturing index on Monday grew at the fastest rate in more than three years, and hiring picked up.

The U.S. has emerged from recession, analysts say, but some worry the economy could slip when government stimulus programs to boost jobs and the housing industry end.

The Senate on Wednesday voted to extend and expand a popular homebuyer tax credit and further extend unemployment benefits.