The U.S. Federal Reserve still isn’t convinced that the recovery is strong enough to bear higher rates, or even the suggestion that rates will be heading higher. Economists don’t see the Fed moving this year.

In its latest rate decision Wednesday, the Fed maintained its key lending rate in the target range of 0% to 0.25% and said that this low level will likely be needed, “for an extended period”.

RBC Economics points out that the statement continues to defy one voter’s, the Kansas City Fed president Thomas Hoenig, contention that the reference to an extended period is no longer warranted.

TD Economics maintains that the Fed will soon have to remove or alter this reference — possibly as soon as the next meeting in August. “Managing market expectations will be a communication challenge when the time comes for the Fed to alter the language because financial participants have come to interpret ‘exceptionally low levels of the federal funds rate for an extended period’ to mean an effective near-zero fed funds rate,” TD says.

One change in the latest statement, RBC notes, is that the Fed said that financial conditions, “have become less supportive of economic growth” attributing the change to developments outside the US. And, it also sees more cautious language on the strength of the recovery compared with recent statements.

“Today’s statement indicates that the Fed still sees the economy as staying on its recovery path, although it views developments abroad as providing some downside risk to the outlook leaving the Fed with no reason, at this juncture, to alter its policy stance,” RBC says.

“This statement is in line with our view that the Fed will maintain its current policy stance until there is evidence that the recovery is generating a sustained narrowing in the output gap and an unwinding of the unemployment rate from today’s high level,” RBC concludes.

“Given that the underlying trend in U.S. job creation remains uncertain and that dust has yet to settle on the euro-zone situation, the Fed is unlikely change raise interest rates before next year,” adds National Bank Financial.

TD doesn’t see the Fed raising rates until the first quarter of 2011, “and even when it does finally get the ball rolling, cautiousness and restraint will continue to be exerted with a fed funds rate ending the year at just 1.50%,” it says.

IE