The decision lifted the USA central bank's benchmark lending rate by a quarter%age point to a target range of 1.00% to 1.25% as it proceeds with its first tightening cycle in more than a decade.
"In view of realized and expected labor market conditions and inflation, the committee made a decision to raise the target range for the federal funds rate to 1 to 1-1.25 per cent, " Fed said, adding, "The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 per cent inflation". The stance of monetary policy remains accommodative, thereby supporting further strengthening of the labour market conditions and a sustained return to 2% inflation. In the 12 months through May, the index rose 1.9 percent.
Near term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely.
The central bank also confirmed that later this year it would begin to implement a plan to reduce the size of its investment holdings, which were built up to record levels during the financial crisis to help support the economy, especially once interest rates reached zero.
They lowered projections for 2017 to 1.6% from their March estimate of 1.9%.
Gold futures tumbled Thursday, extending losses from the previous session after hawkish comments from the Federal Reserve indicating another rate hike in 2017.
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U.S. rates are now at their highest level in nine years.
London's FTSE 100 Index joined global markets in the red after Wednesday's U.S. interest rate hike and as oil prices remained under pressure.
However, Anna Stupnytska, global economist at Fidelity International, said "emerging headwinds" in the U.S. economy meant a second hike would be unlikely this year.
A retreat in inflation over the past two months has caused jitters that the shortfall, if sustained, could alter the pace of future rate hikes.
The Fed said it expects USA inflation to be at 1.7 percent by the end of this year, down from the 1.9 percent previously forecast.
Traders tracked by the Chicago Mercantile Exchange don't expect the Fed to raise rates in September or December.
In her press conference after the announcement, Fed Chair Janet Yellen asserted that US economic growth appears to have rebounded enough to justify both higher rates and a return of Fed-held assets to the wider market. Only Neel Kashkari, president of the Minneapolis Fed bank, opposed the increase.