The Federal Reserve remains on course to raise interest rates this year, which would mark the first such move in nearly a decade, while reducing its forecast for economic growth this year.
"Economic activity has been expanding moderately," the Federal Open Market Committee, the Fed panel that sets short-term interest rates, said in a policy statement after a two-day meeting. "The pace of job gains picked up," with the "underutilization of labor resources diminished somewhat" since policy makers last gathered in April.
In downgrading its estimate for economic growth, the Fed projected real GDP of 1.8 percent to 2 percent in 2015, down from its March projection of 2.3 percent to 2.7 percent. It forecast GDP of up to 2.7 percent next year and up to 2.5 percent in 2017.
"As expected, the Fed downgraded their 2015 GDP forecast. They again have been too optimistic," said Peter Boockvar, chief market analyst at the Lindsey Group.
But Paul Ashworth, chief U.S. economist with Capital Economics, said the Fed's more downbeat forecast mainly reflects weak growth in the first three months of the year, when the economy shrank.
Fed officials reiterated that the timing of a hike in interest rates depends on the strength of economic data, with inflation remaining below the central bank's 2 percent target.
"The committee expects inflation to rise gradually towards 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate," the FOMC said.
Fed Chair Janet Yellen stuck to her script while taking initial questions from reporters, emphasizing that interest rates are likely to rise slowly. She also said that too much attention is being placed on the timing of the first increase, when the longer term view should be more important.
"The importance of the initial increase should not be overstated," she said at a news conference after the FOMC release.
Asked why the Fed is signaling a rate hike this year when entities including the International Monetary Fund have advised holding off until 2016, Yellen said the Fed is balancing the dangers to the economy of moving too early or too late to raise rates.
"There are a set of risks that all of us need to weigh, waiting too long to begin normalization can risk significantly overshooting our inflation objective," Yellen said. "Beginning too early can risk derailing a recovery that we've worked a long time to achieve."
Most analysts expect the Fed will hike its short-term rate in September after being near zero since 2008.