At the conclusion of a two-day policy meeting, the central bank said that while the recovery is continuing at a moderate pace, growth is somewhat slower than expected. It also said the jobs market is "weaker than anticipated."

It also issued new economic projections that call for slower economic growth, higher unemployment and higher inflation in 2011 and 2012 than in its previous forecast.

The Fed said it believed some of the headwinds would be short-lived, including supply disruptions from the Japanese earthquake, and the "effect of higher food and energy prices on consumer purchasing power."

Fed's statement

Still the central bank's statement was gloomier than the one that followed its previous meeting on April 27, when it said it believed the recovery was proceeding at a moderate pace and overall conditions in the labor market were improving gradually.

Since then, there has been a significant slowdown in hiring and disappointing overall growth. The weak economic readings have led many economists to cut their growth forecasts. It has also raised fears of the economy possibly falling into a new recession, although that is still seen as a long shot.

The Fed appeared to downplay the chance of another downturn, saying that it "expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline."

It said household spending and business investment in equipment and software continue to expand, although the housing market remains "depressed."

Keith Hembre, chief economist with Nuveen Asset Management, said he thinks despite the Fed's projection of better growth ahead, the outlook is still uncertain.

"Officially they're on the optimistic side, and they probably remain hopeful," he said. "But they've probably got some doubts about it."

The Fed also dismissed inflation fears voiced by some economists, saying that it believes "inflation will subside" and that "longer-term inflation expectations have remained stable."

But it did drop language in earlier statements that "measures of underlying inflation are still subdued," suggesting that there are more concerns about the increase in core inflation readings.

Still, while the Fed said that it would continue to monitor the situation and take action as needed, it did not signal any additional moves to pump new money into the financial system.

The Fed's latest effort to help the economy was through the purchase of $600 billion in long-term Treasuries, a program that ends this month. Known as the second round of quantitative easing or QE2 for short, it was designed to keep interest rates low.

But the controversial program is widely believed to have been of limited help to the economy. Some also argue that QE2 has contributed to the weakening of the dollar and an unwelcome rise in commodity prices, particularly oil.

Nonetheless, the Fed could be forced to come up with another round of quantitative easing later in the year if it doesn't get the rebound in growth it is looking for, said Keith Springer, president of Springer Financial Advisors.

"They're afraid to come out with a QE3, even though they know we'll need one," he said. "I think they feel like they'll have egg on their face. But they didn't do QE1 and QE2 to let the economy die now."

The Fed also left the fed funds rate, its key interest rate used as a benchmark for a wide range of business and consumer borrowing, near 0%, where it has been since December 2008. It repeated that it believes economic conditions are likely to "warrant exceptionally low levels for the federal funds rate for an extended period."

Federal Reserve chairman Ben Bernanke will be speaking to reporters later Wednesday to further discuss the Fed's economic outlook. This is the second press conference for Bernanke since the Fed announced it would start holding such events earlier this year.