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. It said record-low rates are still needed to help boost an improving but still sluggish economy.
Treasury yields fell on the news. The yield on the five-year Treasury hit an all-time low of 0.76 percent. The yield on the 10-year note sank to 1.95 percent. The 10-year yield had been 2.02 percent just before the Fed made its announcement around 12:30 p.m. EST.
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 54 points an hour after the Fed's announcement.
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 signaling 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.
Chairman Ben Bernanke will discuss the updated economic forecasts and Fed policy at a news conference later.
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 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.