Fed officials reduced their estimate of the unemployment rate that they think is consistent with a healthy economy to a range of 5 per cent to 5.2 per cent. That is down from a previous range of 5.2 per cent to 5.5 per cent. Unemployment now stands at 5.5 per cent, the top of the previous range.
The Fed also sharply reduced its forecasts for economic growth through 2017 from its December projections. It now expects just 2.5 per cent growth this year and next, down from 2.8 per cent and 2.75 per cent, respectively.
Growth will then slow to 2.2 per cent in 2017, the Fed predicts, down from 2.4 per cent.
The Fed updated its economic forecasts after a two-day policy meeting.
Fed policymakers said they expect much lower inflation this year. But it made little change to their forecasts for 2016 and 2017, when they project inflation to be just below their target of 2 per cent.
The reduction in the Fed's long-term unemployment forecast gives policymakers more leeway in their decision on when to start raising the short-term interest rate it controls. Once unemployment falls into the range the Fed considers "full" employment, that would suggest the Fed might soon increase rates to ward off inflation.
The Fed also expects unemployment rates to fall further through 2017. It now projects the rate at the end of this year to be about 5.1 per cent, down from a 5.25 per cent estimate in December. Next year it could drop to 5 per cent, from 5.1 per cent, and in 2017 to 4.95 per cent, down from its earlier forecast of 5.1 per cent.
Those forecasts indicate that the Fed is willing to let unemployment fall below the rate that might spark inflation.