The Fed, which has trimmed its purchases of U.S. Treasuries and mortgage-related debt in the last three months, also said U.S. economic activity has slowed during the winter months, partly due to adverse weather but on balance the labor market had improved.
"The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions," said the Fed in a statement after a meeting of its policy-setting Federal Open Market Committee (FOMC), chaired for the first time by Janet Yellen, who last month succeeded Ben Bernanke.
The U.S. unemployment rate rose to 6.7 percent in February from 6.6 percent in January, but the underlying conditions were still seen improving with the unemployment rate set to decline below 6.5 percent in coming months.
In its latest economic projections, the Fed now sees the unemployment rate falling to 6.1 percent to 6.3 percent this year compared with the previous December forecast of 6.3 percent to 6.6 percent.
In December 2012 the Fed said it would not consider raising its federal funds rate - at 0.0-0.25 percent since December 2008 - until the unemployment rate falls to at least 6.5 percent as long as inflation remains under control.
In December 2013 the Fed updated this forward guidance, saying it would maintain the policy rate at essentially zero "well past" the time the jobless rate falls below 6.5 percent.
While it confirmed that "a highly accommodative stance of monetary policy remains appropriate" to ensure continued progress toward the Fed's twin objective of "maximum employment and price stability, " the FOMC today said it would take into account a wide range of information to determine how long to maintain the current policy rate.
This information includes "measures of labor market conditions, indicators of inflation pressure and inflation expectations, and readings on financial developments."
When the Fed eventually decides to remove its accommodative policy, it said it would take a balanced approach and even after employment and inflation are near levels that are close to its objective, "economic conditions may, for some time, warrant keeping the federal funds rate below levels the Committee views as normal in the longer run."
Although the Fed now sees unemployment falling faster than previously, it trimmed its economic growth forecasts.
Gross Domestic Product is seen expanding by 2.8 to 3.0 percent this year, slightly down from December’s forecast of 2.8 to 3.2 percent, then growing by 3.0 to 3.2 percent in 2015, down from 3.0 to 3.4 percent. In 2016 the U.S. economy is seen growing by 2.5 to 3.0 percent, down from 2.5 to 3.2 percent.
In the fourth quarter of 2013, U.S. GDP expanded by 2.4 percent from the third quarter for annual growth of 2.5 percent, the third consecutive quarter of accelerating growth.
Meanwhile, unemployment is seen dropping to 5.6 to 5.9 percent in 2015, down from December’s forecast of 5.8 to 6.1 percent and in 2016 the unemployment rate is expected to ease to 5.2 to 5.6 percent, down from 5.3 to 5.8 percent.
The Fed’s latest forecast for inflation was largely unchanged with the measure of Personal Consumption Expenditures (PCE) – the Fed’s preferred inflation gauge – rising by 1.5 to 1.6 percent this year, then 1.5 to 2.0 percent in 2015 and 1.7 to 2.0 percent in 2016 as inflation remains below the Fed’s 2.0 percent target.
In February the U.S. headline inflation rate fell to 1.1 percent from 1.6 percent in January.