Fed keeps interest rates unchanged and confirms balance sheet reduction in October.

WASHINGTON (Reuters) - The Federal Reserve, the central bank of the United States, kept interest rates unchanged on Wednesday, but signaled that it still expects another increase by the end of the year despite recent weak inflation readings.

New economic projections released after the Fed's two-day meeting showed that 11 of the 16 members see the "appropriate" level for the interest rate as being in a range between 1,25 percent and 1,5 percent through the end of 2017.

This is 0,25 percentage points above the current level.

"The labor market continues to strengthen... economic activity has grown moderately so far this year," the Fed said in its monetary policy statement. It added that near-term risks to the economic outlook remained "virtually balanced," but that inflation was being watched "closely."

The outlook for interest rates next year remained virtually unchanged, with three rate hikes projected. But the U.S. central bank slowed the pace of projected monetary tightening from then on.

The Fed forecasts only two rate hikes in 2019 and one in 2020. It also lowered its estimated long-term "neutral" interest rate again to 2,75 percent, from 3 percent, reflecting concerns about the overall economic vitality.

As expected, the Fed also said it will begin in October to reduce its balance sheet holdings of approximately $4,2 trillion in Treasuries and mortgage-backed securities, initially cutting up to $10 billion each month from the volume of maturing securities it reinvests.

This action will initiate a gradual reversal of the three rounds of quantitative easing by the Fed that occurred between 2008 and 2014 to stimulate the economy after the financial crisis and the recession between 2007 and 2009.

The reinvestment limit is scheduled to increase by $10 billion per year every three months up to a limit of $50 billion per month, until the central bank's balance sheet falls by about $1 trillion or more in the coming years.

The statement and projections showed that the Fed is still trying to balance an economic recovery that has kept unemployment low in the US and is gaining momentum globally with a recent worrying drop in US inflation.

The central bank also noted that the recent hurricanes in the United States will affect economic activity, but that they "are not expected to materially alter the course of the national economy in the medium term."

Forecasts for economic growth and unemployment in 2018 and subsequent years remained virtually unchanged. The expectation is that Gross Domestic Product will grow 2,4 percent this year, 2,1 percent next year, and 2,0 percent in 2019.

The unemployment rate is expected to remain at 4,3 percent this year before falling to 4,1 percent next year and staying at that level in 2019.

Inflation is expected to remain below the Fed's 2 percent target through 2018, before reaching it in 2019.

There were no dissenters in the Fed's monetary policy decision.