This was the seventh rate hike since late 2015, when the Fed first began lifting interest rates from nearly zero. It kept borrowing costs that low after the financial crisis to encourage businesses and consumers to spend and grow the economy.
USA unemployment is already at 3.8 per cent, the lowest since 2000, and the Fed believes it will fall to 3.6 per cent by the end of the year, which would be the best rate since the 1960s.
Economists said the Fed left little doubt that it's prepared to increase the pace of its credit tightening to guard against high inflation later on.
The increase marks the highest level of interest rates in the United States since 2008. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.
Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, is scheduled to deliver his comments on the monetary policy in a press conference at 18:30 GMT. "This change is only about improving communications".
The median average of the central bank's updated forecasts - also referred to as the "dot plots" - called for interest rates to end the year around at 2.4%, up from March's projection of 2.1%; The forecasts suggest the Fed will raise interest rates two more times this year.
In addition to a new dot plot, the Fed updated its forecasts for economic growth and inflation.
Traders also began pricing in a higher chance of a slightly steeper path of rate hikes next year, futures prices showed, though the path indicated by the Fed's forecasts stuck to the three rate hikes anticipated for 2019 based on Fed forecasts provided in March. In the longer run, it maintained the forecast for 1.8% growth.
On inflation, policy makers forecast a slight overshoot of their target starting in 2018 at 2.1 per cent, and running through 2019 and 2020, compared with a 2020 overshoot in March's projections. In its statement the central bank said that "economic activity has been rising at a solid rate". "Ongoing job gains are boosting wages and confidence". Inflation by the Fed's preferred gauge would hit its 2 percent target this year and edge up to 2.1 percent over the next two years.
The committee sees further declines the unemployment.
Fed says further gradual rate increases will be consistent with sustained economic growth, strong labor market and inflation near 2 percent over medium term. Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced".
Job growth has consistently outperformed in recent years, driving unemployment down to 3.8 percent in May, the lowest reading since 2000.
The rate hike on Wednesday was the seventh in this cycle and effectively marked a shift to a neutral stance in which the policy rate matches inflation at just under 2 percent, leaving zero "real" accommodation.
"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective". This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and worldwide developments.