Federal Reserve Board Chairman Jerome Powell speaks at his news conference after the two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., June 13, 2018.
Two additional rate hikes are predicted this year, for a total of four.
Fed officials expect to raise interest rates at least once more in 2018 and had been split on a possible fourth hike in their last meeting. The action means consumers and businesses will face higher loan rates over time.
The rate increase was in line with investors' expectations and showed policymakers' confidence in the economy's growth prospects, continued low unemployment and steady inflation.
Announcing the decision to increase its target for the fed-funds rate to a range of 1.75% to 2%, the Fed described the U.S. jobs market as "strong" and said economic activity had been rising at "a solid rate".
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"The labor market is getting tighter, and price pressures are picking up", said Greg McBride, chief financial analyst at Bankrate.com.
The ongoing economic expansion coupled with solid job growth has pushed the Fed to raise rates seven times since late 2015, rendering the language of its previous policy statements outdated. The Fed's new projection for the pace of rate hikes shows four this year, three in 2019 and one in 2020.
Powell is scheduled to speak to reporters Wednesday afternoon.
But, he added, "We really don't see it in the numbers".
While an improving economy is good for the job market and worker wages, it's bad for credit-card borrowers because it means higher interest costs.
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Fed policymakers projected gross domestic product would grow 2.8 percent this year, slightly higher than previously forecast, and dip to 2.4 percent next year, while inflation is seen hitting 2.1 percent this year and remaining there through 2020.
They see another three rate increases next year, a pace unchanged from their projections in March.
USA unemployment dropped to 3.8% in May, its lowest level since April 2000 and one of the lowest levels since the second world war.
The Fed aims to achieve its mandates of maximizing employment and stabilizing prices by lowering rates to spur growth during times of economic weakness and raising rates to slow growth if the economy threatens to overheat.
The Fed's pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including from a potential trade war that could break out between the United States and such key trading partners as China, the European Union, Canada and Mexico. While the national economy appears to be on solid ground for 2018, the Fed must now consider how growing worldwide trade disputes could slow US growth.
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