Speaking at a news conference after a Wednesday meeting, Yellen noted that the historically low rates haven't caused the economy to overheat. Steady job gains have pulled discouraged workers back into the job market, such that the unemployment rate has held steady at 4.9 percent in recent months despite a relatively robust period of hiring.
"The economy has a little more room to run than previously thought," Yellen said.
Fed policymakers also forecast that inflation will nearly reach its 2 percent target next year and remain 2 percent in 2018 and 2019. Yet inflation has remained below that level for more than three years.
Their overall outlook is more cautious than the last time they issued interest rate projections three months ago. They foresee only two rate hikes next year and two in 2018, down from three each year.
Fed officials also marked down their estimate of the long-run level of short-term rates to 2.875 percent from 3 percent in June. That is down sharply from 3.5 percent in December, a sign the Fed expects that growth will remain sluggish and inflation low for the foreseeable future.
In that environment, fewer rate increases would be needed.
The projections reflect the forecasts of all 17 participants in the Fed's deliberations. Only 10 of those members actually vote on the Fed's decisions.
Fed officials concluded that economic growth is improving after an anemic first half of the year, job gains are approaching an apex and inflation remains low. But in a statement after their Wednesday meeting, the majority of Fed officials chose "to wait for further evidence of continued progress."
Fed committee members meet again in November and December, with the markets expecting at least one rate hike before 2017.
Economists expect the Fed will stand pat, keeping the short-term interest rate it controls between 0.25 percent and 0.5 percent. That's just a quarter-point above the record low of nearly zero, where it stood for seven years until the Fed boosted it last December.
At the time, it forecast four additional rate increases this year. But gyrating stock markets,
Still, analysts hope to glean additional insights into Yellen's thinking regarding the economy's sluggish growth and last month's downshift in hiring.
Stocks are higher on
Most economists expect the Fed to leave rates unchanged. They think policymakers want more time to evaluate the health of the
The Dow Jones industrial average added 82 points, or 0.5 percent, to 18,211. The