The central bank said it would probably not increase its benchmark interest rate until late 2014 at the earliest — a year and a half later than it had previously said.
The new timetable showed the Fed is concerned that the recovery remains stubbornly slow. But it also thinks inflation will stay tame enough for rates to remain at record lows without igniting price increases.
Chairman Ben Bernanke cautioned that late 2014 is merely its "best guess." The Fed can shift that plan if the economic picture changes. But he cast doubt on whether that would be necessary.
"Unless there is a substantial strengthening of the economy in the near term, it's a pretty good guess we will be keeping rates low for some time," he said.
The Fed has kept its key rate at a record low near zero for about three years. Its new time frame suggests the rate will stay there for roughly an additional three years.
The bank's tepid outlook also suggests it's prepared to do more to help the economy. One possibility is a third bond-buying program that would seek to further drive down rates on mortgages and other loans to embolden consumers and businesses to borrow and spend more.
In a statement after a two-day policy meeting, the Fed said it stands ready to adjust its "holdings as appropriate to promote a stronger economic recovery in the context of price stability."
Treasury yields fell after the midday announcement. But yields stopped falling after the bank later issued forecasts for the economy and interest rates. They showed that while some members foresee super-low rates beyond 2014, six of the 17 members forecast a rate increase as early as this year or next.
It was the first time the Fed had released interest-rate forecasts from its committee members. It will now do so four times a year, when it also updates its economic outlook.
The rate forecasts are an effort to provide more explicit clues about the Fed's plans. They also coincide with a broader Fed effort to make its communications with the public more open.
Lower yields on bonds tend to encourage investors to shift money into stocks, which can boost wealth and spur more spending.
Stocks, which had traded lower before the Fed's announcement, quickly recovered their losses. The Dow Jones industrial average closed at 12,758.85, its highest close in more than eight months.
Some economists said the new late-2014 target may foreshadow further Fed action to try to invigorate the economy.
Julie Coronado, an economist at BNP Paribas, said she thought the Fed was indicating that it will step up its purchases of bonds and other assets if economic growth fails to accelerate — even if it doesn't slow.
That is a "very low bar indeed," she wrote in a note to clients.
Other analysts fear that the Fed's longer-term timetable for a rate increase could hamstring it, even though Bernanke stressed the Fed's ability to adjust rates as it sees fit.
Dana Saporta, an economist at Credit Suisse, worried that the much-longer timetable would compromise the Fed's credibility if it must raise rates sooner because of unexpectedly strong growth and inflation.
"It's striking that the Fed would make an implicit commitment for almost three years," Saporta said. "It seems like an awfully long time to make such a statement. Given that no one knows what will happen ... the (Fed) may eventually regret this."
The central bank slightly reduced its outlook for growth this year, from as much as 2.9 per cent forecast in November down to 2.7 per cent. For the first time, the Fed provided an official target for inflation — 2 per cent — in a statement of its long-term policy goals.
The bank sees unemployment falling as low as 8.2 per cent this year, better than its earlier forecast of 8.5 per cent. December's unemployment rate was 8.5 per cent.
Those rates are still far higher than normal. The Fed didn't set a formal target for unemployment, but it said a rate between 5.2 per cent and 6 per cent would be consistent with a healthy economy.
Bernanke noted that the Fed expects only moderate growth over the next year. He pointed to the persistently depressed housing market and continued tight credit for many consumers and companies.
The Fed described inflation as "subdued," a more encouraging assessment than last month.
"This is a fairly clear-cut signal that inflation is not on their radar at this point," Tom Porcelli, an economist at RBC Capital Markets, wrote in a research note.
The Fed's statement was approved on a 9-1 vote. Jeffrey Lacker, president of the Richmond regional Fed bank, dissented. He objected to the new time frame for a rate increase.
The extended time frame is a shift from the Fed's previous plan to keep the rate low at least until mid-2013.
Beyond the adjusted outlook for interest rates, Wednesday's statement used the same language as before in describing Europe's debt problems and the impact on the world economy.
The threat of a recession in Europe is likely to drag on the global economy. And another year of weak wage gains in the United States could force consumers to pull back on spending, which would slow growth.
But for now, the American economy is looking a little better. Companies are hiring more, the stock market is rising, factories are busy and more people are buying cars. Even the home market is showing slight gains after three dismal years.
The Fed has taken previous steps to strengthen the economy, including purchases of $2 trillion in government bonds and mortgage-backed securities to try to cut long-term rates and ease borrowing costs.
Some Fed officials have resisted further bond buying for fear it would raise the risk of high inflation. And many doubt it would help much since Treasury yields are already near historic lows.