The Fed has raised its benchmark interest rate by 0.25% for only the third time in a decade.
It voted to raise its key rate target to a range of 0.75% to 1%.
The central bank had been expected to raise rates after a robust February jobs report, solid pay gains, rising inflation and a dip in the unemployment rate to 4.7%.
Its policymakers are expected to increase rates a total of three times this year.
The Federal Reserve aims to keep the cost of lending between banks within a specified band, which it does by buying or selling financial assets.
It is raising that band by a quarter of a percent.
Fed Chair Janet Yellen said the committee judged that a “modest increase” in the rate is appropriate “in light of the economy’s solid progress.”
The decision was approved with a 9-1 vote. Neel Kashkari, the head of the Fed’s regional bank in Minneapolis, cast the dissenting vote.
This is the second time the Fed has raised rates in three months. It signaled that further hikes this year will be gradual.
The Fed’s statement said its inflation target was “symmetric,” indicating that after a decade of below-target inflation it could tolerate a quicker pace of price rises.
Wall Street stock indexes jumped after the announcement, with the Dow Jones Industrial Average up 112 points at 20,950 in afternoon trading.
The US dollar fell about 0.9% against the euro and more than 1% against the pound.
The Fed’s outlook for the economy changed little, with officials expecting economic growth of 2.1% this year and next year before slipping to 1.9% in 2019.
Those forecasts are far below the 4% growth that President Donald Trump has said he can produce with his economic program.
However, Janet Yellen told reporters that she didn’t believe it is “a point of conflict” between the Fed and the Trump administration.
“We would certainly welcome stronger economic growth in the context of price stability, and if policies were put in place to speed growth… those would be very welcome changes that we would like to see,” she said.