The Fed pushed back the date for any likely increase in its benchmark interest rate by at least a year and a half, until late 2014 at the earliest.
Its new timetable showed the Fed is concerned that the economy's 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 its late-2014 horizon for any rate increase is merely the Fed's "best guess." It has the flexibility to shift its timetable if the economic picture changes. But speaking at a news conference later Wednesday, Bernanke said:
"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."
Treasury yields fell after the Fed made its announcement around 12:30 p.m. (1730 GMT). But yields stopped falling after the Fed 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 this year or next.
Lower yields could help further reduce mortgage rates and possibly boost stock prices as investors shift out of lower-yielding Treasurys.
Stocks, which had traded lower all day, quickly recovered their losses. The Dow Jones industrial average, which had been down about 60 points before the announcement, was up 84 points in late afternoon.
Though Bernanke stressed the Fed's flexibility to adjust rates as its outlook shifts, some analysts expressed concern.
Dana Saporta, an economist at Credit Suisse, said the Fed's now-much-longer timetable for a likely rate increase could compromise its credibility if it must raise rates before late 2014. Unexpectedly strong growth and inflation could force such an increase.
"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 Fed reduced its outlook for growth this year but is slightly more optimistic about the unemployment rate. It expects the economy to grow between 2.2 per cent and 2.7 per cent this year. That's down from its November's forecast of between 2.5 per cent and 2.9 per cent.
But it sees unemployment falling as low as 8.2 per cent this year, better than its earlier forecast of 8.5 per cent. December's rate was 8.5 per cent.
The Fed also offered a firmer target for inflation — 2 per cent — in a statement of its long-term policy goals.
The central bank said in a statement after a two-day policy meeting that the economy is growing moderately, despite some slowing in global growth. It held off on any further bond-buying programs to try to increase growth.
The Fed announced no further bond buying efforts. But it held out the possibility of doing so later. It said it was prepared to adjust its "holdings as appropriate to promote a stronger economic recovery in the context of price stability."
Some economists say that means the Fed will take further action soon.
Julie Coronado, an economist at BNP Paribas, said the Fed is signalling it will boost its purchases of bonds and other assets if growth fails to accelerate, even if the economy doesn't slow.
That is a "very low bar indeed," she wrote in a note to clients.
The Fed described inflation as "subdued." That was a more encouraging description than it offered last month. A more positive outlook on prices gives the Fed more room to keep rates low.
"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. Some economists said the new late-2014 target could lead to further Fed action to try to invigorate the economy.
The central bank 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.
Beyond the adjusted outlook for interest rates, Wednesday's statement closely tracked the Fed's previous comments about economic conditions.
The Fed used the same language as before in describing Europe's debt problems and the impact on the world economy.
The U.S. economy is looking a little better, according to recent private and government data. 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
Still, 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.
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.
The idea behind the Fed's two rounds of bond buying was to drive down rates to embolden consumers and businesses to borrow and spend more. Lower yields on bonds also encourage investors to shift money into stocks, which can boost wealth and spur more spending.
Some Fed officials have resisted further bond buying for fear it would raise the risk of high inflation later. And many doubt it would help much since Treasury yields are already near historic lows. But Bernanke and other members have left the door open to further action if they think the economy needs it.
The Fed said it would keep its holdings of Treasury securities and mortgage-backed bonds at record levels and continue a program to further drive long-term rates lower by selling shorter-term securities and buying longer-term bonds.