The Federal Reserve held short-term interest rates steady and officials lowered projections of how much they'll raise them in the coming years, signs that persistently slow economic growth and low inflation are forcing the central bank to rethink how fast it can lift borrowing costs.
Wednesday's moves marked a stark reversal from just a few weeks ago, when several Fed officials, including Chairwoman Janet Yellen, dropped strong hints they might raise rates in June or July. Instead, she emphasized the central bank's uncertainty about when they'll act and where rates are headed in 2018 and beyond.
"I can't specify a timetable," about when rates will next be raised, she said at a press conference following the Fed's two-day policy meeting. "We are quite uncertain about where rates are heading in the longer term."
The uncertainty was striking in part because the Fed's forecasts for the economy didn't change much from the quarterly projections released in March. Officials still expect modest economic growth near 2% annually over the next three years, a rise in consumer-price inflation to 2%, and an unemployment rate below 5%.
Those metrics don't add up to a booming economy, but the expected performance is better than that of other large developed markets, including Japan and the European Union, which are struggling with slower growth and lower inflation. The expected growth also marks a steadiness that stands in contrast to China's economic slowdown.
The combination of relatively stable economic projections and a lower interest-rate outlook suggests officials are coming to the conclusion that the economy simply can't bear very high interest rates, even to achieve the mediocre growth and low inflation officials have in mind.
Ms. Yellen previously said she believed temporary headwinds were holding back the economy. She conceded Wednesday that such drags, such as slow productivity growth, might persist. Moreover, new ones, such as China's slowdown, are emerging.
Notably, Ms. Yellen won a unanimous vote on Wednesday's policy statement. Kansas City Fed President Esther George, who dissented in March and April in favor of a rate increase, instead voted with the majority.
Fed officials have been weighing whether the economy's equilibrium interest rate—a rate at which the economy is in balance, growing with stable inflation and low unemployment—has fallen because of long-running trends holding back growth and beyond the Fed's control, such as the retirement of older workers and low productivity growth.
Paul Willson, chairman of the $ 550 million-asset Citizens National Bank in Athens, Tenn., worries an increase in interest rates now could knock the economic expansion off course.
Mr. Willson likens the Fed's low-rate policy to an aircraft flying low to the ground: With rates so close to zero, the risks of a policy misstep are greater. "We've got enough viable air speed but we don't have much altitude," he said of the U.S. economy. "And that worries me. Any missed input could screw things up."
The Dow Jones Industrial Average retreated after the Fed's release, finishing the day down 34.65 points, or 0.2%, at 17640.17 after trading in positive territory leading into the release. Yields on 10-year Treasury notes, which tend to go down when investors become risk-averse or pessimistic about growth, dropped to 1.594%, the lowest level since December 2012.
The central bank in December lifted its benchmark federal-funds rate up from near zero to between 0.25% and 0.5%. Officials indicated then they expected to push rates up four times in quarter-percentage-point increments this year to 1.375% at the end of 2016.
Instead, their rate target has been unchanged since December and they have cut in half their expectations for rate rises this year.
The economy and financial markets haven't cooperated with the Fed's plans. Early in the year, market turbulence and slow economic growth gave officials pause. Growth appears to have picked up and markets have largely settled down, but now hiring and expected inflation are a cause of concern for officials. "Recent economic indicators have been mixed, suggesting our cautious approach to adjusting monetary policy remains appropriate," Ms. Yellen said Wednesday, while noting that observers should not read too much into any one report.
The new projections released Wednesday showed officials expect the fed-funds rate to rise to 0.875% by the end of 2016, according to the median projection of 17 officials. That implies they see two quarter-point rate increases this year, as they did in March.
However, a greater number of officials now see just one increase, rather than two moves. In March, just one official saw one rate increase this year and seven saw three or more. Now six officials see one increase this year and two see three or more.
Ms. Yellen said a rate increase at the Fed's next meeting in July is "not impossible." The tone of the Fed's official statement, its projections and her comments suggest officials would need to see a quick turnaround in economic data and evidence of market resilience if they were to move so soon.
"We need to assure ourselves that the underlying momentum in the economy has not diminished," she said.
The new projections also show central-bank officials see the fed-funds rate at 1.625% by the end of 2017 and 2.375% at the end of 2018, both lower than their March estimates.
In the longer run, Fed officials now expect the benchmark rate to reach 3%, lower than the 3.25% they saw in March.
Jeremy Ames, president and co-founder of Guidant Financial in Bellevue, Wash., said Fed officials may still be too optimistic in their projection that short-term rates will rise above 2% in the next couple of years.
"I think that assumes everything is going well and everything is going swimmingly," said Mr. Ames, whose firm finances small-business startups and acquisitions. "If they hit those time frames, I would be surprised."
Traders on the Chicago Mercantile Exchange placed a 7% probability on a Fed rate increase in July and a 23.9% probability on at least one increase by September. Though most Fed officials see at least two quarter-point rate increases before year-end, traders see a 57% probability that it won't.
The June 23 U.K. vote on whether to leave the European Union was one factor in Fed officials' decision to leave rates unchanged, and "clearly could have consequences" for economic and global financial markets, Ms. Yellen said.
Fed officials last month appeared poised to raise rates in June or July. Ms. Yellen said in late May a move was probable "in the coming months" if the economy continued to strengthen—wording she has not repeated in her two public appearances since the Labor Department released a disappointing May employment report.
Employers added just 38,000 jobs last month and payroll growth in April and March was revised lower. The share of Americans participating in the workforce also declined, and the number of employees stuck in part-time jobs rose, the report showed. Still, the number of Americans filing first-time claims for unemployment insurance remains at historically low levels.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Kate Davidson at kate.davidson@wsj.com
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