The Federal Reserve held interest rates steady at historic lows Wednesday, welcoming the improving economy and making few changes to its debt-buying plans as it buys time to monitor how the nation recovers from the worst recession in 80 years.

Fed officials said that economic activity has “picked up” with improved conditions in housing and financial markets. Businesses are slowing down their efforts to cut costs, according to the Fed statement, which came after a closed-door, two-day meeting of the Federal Open Markets Committee.

In a decision watched closely by the bond markets, the Fed announced that it has extended its purchase of mortgage-backed securities and agency debt into the first quarter of 2010. Analysts had expected the move, which smoothes out the purchases.

The Fed has purchased $857 billion of its scheduled $1.25 trillion in mortgage-backed securities, according to Morgan Stanley. It’s also bought $129.2 billion of the planned $200 billion in so-called agency debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which finance mortgage purchases. Those programs had been officially expected to end in December.

As expected, the Fed kept its target for its federal funds rate set at a range of zero to 0.25%. The Fed repeated that it “continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”