After contracting in the first quarter, the economy is now on track to grow between 1.8 percent and 2.0 percent this year, down from the 2.3-2.7 percent range forecast in March, according to the central bank's latest policy statement and new projections issued by Fed policymakers.
The Fed also said labor markets continued to improve, though with unemployment expected to be slightly higher at the end of the year than previously forecast in March. Inflation remains low but is expected to gradually rise to its 2 percent target over the medium term, the Fed said.
Still, the statement and forecasts keep the Fed on track to raise rates once or twice over its four remaining policy-setting meetings in 2015.
"The Fed has two criteria: labor market improvement, which we continue to see, and confidence that inflation will move to its objectives. That's starting to happen," said Wayne Kaufman, chief market analyst at Phoenix Financial Services in New York.
Financial markets were little moved by the central bank's decision and statement. Stocks, which were trading mildly lower beforehand, turned slightly positive while U.S. Treasury securities cut losses and are near the highest levels of the U.S. session. The dollar index was at the day's low, off about 0.44 percent.