The Fed has decided to raise its benchmark interest rate by 0.25%, from 0.5% to 0.75%, citing a stronger economic growth and rising employment.
This is only the second interest rate increase in a decade.
The central bank said it expected the economy to need only “gradual” increases in the short term.
Fed chief Janet Yellen said the economic outlook was “highly uncertain” and the rise was only a “modest shift”.
However, the new administration could mean rates having to rise at a faster pace next year, Janet Yellen signaled at a news conference after the announcement.
President-elect Donald Trump has promised policies to boost growth through tax cuts, spending and deregulation.
Janet Yellen said it was wrong to speculate on Donald Trump’s economic strategy without more details.
She added that some members of the Federal Open Markets Committee (FOMC), the body which sets rates, have factored in to their forecasts an increase in spending.
As a consequence, the FOMC said it now expects three rate rises in 2017 rather than the two that were predicted in September.
Janet Yellen told the news conference: “We are operating under a cloud of uncertainty… All the FOMC participants recognize that there is considerable uncertainty about how economic policy may change and what effect they may have on the economy.”
Also, the Fed chairwoman declined to be drawn on Donald Trump’s public comments about the central bank, and his use of tweets to announce policy and criticize companies.
“I’m a strong believer in the independence of the Fed,” Janet Yellen told journalists.
“I am not going to offer the incoming president advice.”
The interest rate move had been widely expected, and followed the last increase in 2015.
Rates have been near zero since the global financial crisis. But the US economy is recovering, underlined by recent data on consumer confidence, jobs, house prices and growth in manufacturing and services.
Janet Yellen said the rate rise “should certainly be understood as a reflection of the confidence we have in the progress that the economy has made and our judgment that that progress will continue”.
Although inflation is still below the Fed’s 2% target, it expects the rise in prices to pick up gradually over the medium term.
The Fed also published its economic forecasts for the next three years.
These suggest that the Federal Funds rate may rise to 1.4% in 2017; 2.1% in 2018; and 2.9% in 2019.
GDP growth will rise to 2.1% in 2017 and stay there, more or less, during those years.
The unemployment rate will fall to 4.5% over the 2017-2019 period, the Fed forecast.
Inflation will rise to 1.9% next year and hover at that level for the next two years.
The dollar rose 0.5% against the euro to €0.9455, and was 0.9% higher against the yen at 116.17 yen.
Following the Fed’s announcement, Wall Street’s main stock markets were largely unmoved, but drifted lower later. The Dows Jones index closed down 0.6%, and the S&P 500 was 0.8% lower.
According to the Labor Department figures, the US economy added only 142,000 jobs in September 2015, lowering the chance of an interest rate rise this year.
The number of jobs created in September was far lower than the 205,000 increase forecast by economists.
The July and August figures were revised down by a combined 59,000.
On October 2, Wall Street opened sharply lower, with the Dow Jones and S&P 500 indexes both down about 1.3%.
However, both indexes later recovered to be up about 0.5% and 0.6% respectively.
The poor figures also resulted in a rollercoaster ride for the FTSE 100, which ended the day up 0.9% at 6,129.9 points despite also turning negative in afternoon trading.
The Labor Department numbers reinforced fears that the China-led global economic slowdown is hitting America’s recovery, adding to doubt about whether the Federal Reserve will raise rates before 2016.
The number of new jobs for August was cut by 37,000 to 136,000 – in sharp contrast to the upward revision expected by economists.
The July total was also reduced, by 22,000 to 245,000.
The number of new jobs created in the US has averaged 198,000 a month for 2014 – below last year’s average of 260,000.
However, the unemployment rate held steady at 5.1%.
The jobless rate, which is derived from a separate survey of households, was unchanged only because 350,000 workers stopped looking for work last month and were no longer counted as part of the labor force.
The proportion of Americans who either have a job or are looking for one fell to a 38-year low, partly reflecting retirements of older workers from the baby boomer generation.
Average hourly wages fell by 1 cent to $25.09 during the month and were only 2.2% higher than the same month in 2014.
The data also knocked the dollar lower, with the pound rising 0.6% to $1.5238 after the numbers were released. Yields on government bonds also fell.
The US unemployment rate has fallen to 5.8% after the economy added 214,000 jobs in October 2014, official Labor Department figures show.
The number of jobs created is slightly below forecasts of about 230,000 new posts, but still indicates a healthy US jobs market.
The figures are a significant gauge of the health of the economy.
US employers have added at least 200,000 jobs for nine months in a row, the longest growth period since 1995.
Jobs figures for August and September were also revised higher.
The US unemployment rate has fallen to 5.8 percent in October 2014
The burst of hiring lowered the unemployment rate to 5.8% from 5.9%. That is the lowest rate since July 2008.
Shares in New York were down shortly after the start of trading. The Dow Jones was 0.28% lower at 17505.28.
The number of unemployed in the US has dropped to 8.995 million, below nine million for the first time in six years.
The work force participation rate, which counts those with jobs and those actively seeking jobs, was barely changed in October at 62.8%.
The financial crisis of 2008 has dented that rate, with some people simply giving up the search for work.
Although economic growth has picked up this year and job opportunities with it, this week’s mid-term elections revealed employment was voters’ top worry, suggesting many Americans have not yet felt any improvement.
The US unemployment rate fell from 6.1% in August 2014 to 5.9% in September 2014, official figures have shown.
The rate is the lowest recorded since July 2008.
US Labor Department also said that employers added 248,000 jobs last month, and the job growth figures for August and July were revised upwards.
The jobs figures are seen as a significant gauge of the health of the economy and there has been much debate over when US interest rates will rise.
The US Federal Reserve has kept interest rates close to zero since the financial crisis in 2008.
US markets cheered the news, with the Dow Jones Industrial Average rising over 100 points.
The US dollar was pushed higher as expectations rose that interest rates would go up sooner than previously predicted.
The US unemployment rate in September 2014 is the lowest recorded since July 2008 (photo AP)
“The most important item in this report is the drop in the unemployment rate below 6%. [Fed Chair Janet] Yellen has said there is only so much slack if the unemployment rate falls below 6%,” said Christopher Low, chief economist at FTN Financial in New York.
The Fed’s stimulus program, known as “quantitative easing”, is due to end this month. Its aim was to keep long-term interest rates low using the purchase of bonds, and thus to boost spending.
The Federal Reserve has indicated it will raise short term interest rates if the economy continues to grow. Janet Yellen has given no firm date for the rise, but the Fed has said the move will come a “considerable time” after the stimulus program ends.
The Labor Department said 69,000 more jobs were created in July and August than previously estimated. It also said nearly 100,000 jobseekers stopped looking for work in September.
The largest rise in employment was in professional and business services, including management and legal services, which saw an increase of 81,000 jobs in September.
The retail sector added 35,000 jobs compared with the previous month. Employment in the health care, construction and leisure and hospitality sectors also continued to increase.
The US economy added 209,000 jobs in July bringing the unemployment rate to 6.2%, latest data from the Bureau of Labor Statistics has shown.
The biggest job gains were in professional business services and manufacturing jobs.
On Wednesday, the Commerce Department said the US economy grew by a better-than-expected 4% during the April-to-June period.
In an encouraging sign, the number of people in the US labor market increased slightly, meaning that workers who may have given up looking for a job have now begun to re-enter the jobs market.
The May and June jobs data were also revised upwards to show that the US economy added 15,000 more jobs.
Some economists had been expecting even larger figures, and US stock markets were down on the less-than-expected gains.
The US economy added 209,000 jobs in July bringing the unemployment rate to 6.2 percent
The Dow dropped nearly 80 points, following steep losses the day before.
Nonetheless, most analysts agreed that there was nothing obviously negative about the report.
July is often one of the weaker months for jobs growth, which is one possible reason for the uptick in the unemployment rate.
However, the figures are encouraging, as the US economy needs to add at least 150,000 jobs each month simply to keep up with population growth.
This is the sixth straight month that the US economy has added more than 200,000 jobs.
Yet there are still reasons to be concerned: wage growth remains flat and the number of long-term unemployed – those out of work for longer than six months – was essentially unchanged at 3.2 million, or a third of those looking for work.
US Federal Reserve chair Janet Yellen recently highlighted that while the employment data is certain better than in the aftermath of the 2008-2009 recession, challenges remain.
According to latest figures from the Bureau of Labor Statistics, the US economy added 288,000 jobs in June 2014.
The unemployment rate dropped to 6.1%, its lowest level since September 2008.
That figure beat analysts’ expectations and is an encouraging sign after disappointing growth in the first quarter of 2014.
The strong report sent the Dow Jones Industrial Average above 17,000 for the first time as investors cheered the news.
The US economy added 288,000 jobs in June 2014
Economists blamed harsh winter weather for a 2.9% annualized decline in US economic output from January to March.
Jobs growth in professional and business services was particularly strong, with 67,000 jobs being created, followed by gains in the retail sector, which added 40,000 jobs.
Hourly wages – which is a measure watched closely by policy makers and has been recently highlight by Federal Reserve chair Janet Yellen – rose 0.2% in June and have climbed 2.0% for the year.
“There really isn’t anything to be disappointed with,” wrote Jefferies bank economists in a note to clients, noting that manufacturing jobs growth was particularly strong.
“There was a 0.2% dip in the unemployment rate based on “good reasons” and household employment was up strongly,” they added.
One “good reason” was that unlike in past reports, where the unemployment rate has dipped primarily because many Americans had given up looking for work, the June decline seems to be mostly due to actual jobs growth.
The labor force participation rate remained steady at 62.8%, indicating that decline was not due to discouraged workers.
However, long-term unemployment remains an ongoing concern.
The number of US job-seekers who have been out of work for over 27 weeks decreased by 293,000 in June, to 3.1 million people – around a third of those who are out of work.