The U.S. Federal Reserve said Wednesday it likely won't raise interest rates from their current record low levels until late 2014. 

Previously, the Fed had said it would keep rates low until mid-2013. This latest announcement by the Fed extends that time frame for low rates by up to 18 months. 

The U.S. central bank said its decision to keep rates low for an extended period was intended to boost a struggling but modestly growing American economy.

"Economic conditions ...  are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the Fed said in a statement.

"Unless there is a substantial strengthening of the economy in the near term, it's a pretty good guess we will be keeping rates low for some time," Federal Reserve chairman Ben Bernanke said later at a news conference. 

Inflation 'subdued'

As expected, the Fed left its federal funds rate unchanged at a rock-bottom zero to 0.25 per cent — the same level it's been for the last three years.

The decision to stand pat on rates was widely expected by the market. But the Fed's forecast of an extended period of exceptionally low interest rates gave a boost to U.S. stock markets. The Dow Jones industrial average, which had been down 60 points before the announcement, turned positive afterward.   

The Fed seems "less concerned about inflation, dropping a sentence that previously stated they were monitoring it closely," noted CIBC World Markets economist Avery Shenfeld.

For the first time, the Fed also established a target for inflation — two per cent.

The Fed also downgraded its forecast for U.S. economic growth. It now projects growth of 2.2 to 2.7 per cent for 2012. As recently as November, it saw economic growth this year as being in a range of 2.5 to 2.9 per cent.

The Fed also sees the U.S.unemployment rate edging down from the current 8.5 per cent to as low as 8.2 per cent later this year. But it doesn't see the U.S. jobless rate dropping below seven per cent until 2014.

The Fed's updated quarterly forecast also revealed that some members of its powerful rate-setting committee wanted the period of low rates to extend even beyond 2014.

The Fed's new transparency is meant to provide business and consumers with some assurance that rates are likely to remain low for some time to come. 

Rebound tentative

The U.S. economy is still shaky, the Fed said, but it is finally beginning to show some signs that it might be rebounding. 

Companies have begun to hire again and the stock market has been rising. Home prices are only now beginning to rise after three years of steep declines. 

But Bernanke warned that Europe's slowdown had the potential to derail the "moderate" expansion the U.S. in now experiencing. "Strains in global financial markets continue to pose significant downide risk to that outlook," he said.

In the recent past, the Fed has embarked on a couple of rounds of aggressive bond buying. This strategy, known as quantitative easing, is designed to lower long-term rates. 

On Wednesday, the Fed did not announce any new bond-buying program. But it said it was prepared to adjust its "holdings as appropriate to promote a stronger economic recovery in the context of price stability."

With files from The Associated Press