The rate increase was the second tightening of monetary policy by the Fed in the last decade (since July 2006) and follows a similar-sized increase 12 months ago in December 2015.
The decision was unanimous by the Fed's policy-making body, the Federal Open Market Committee (FOMC), and is in line with expectations in financial markets. At its last meeting in November, two of the 12 FOMC members had voted to raise the rate by 25 basis points.
In its statement, the FOMC said the labour market had continued to strengthen and economic activity had been "expanding at a moderate pace since mid-year," a slightly more upbeat message than in its November statement when it said growth of economic activity "had picked up from the modest pace seen in the first half of the year."
In its update to economic projections, the forecast for the federal funds rate in 2017 was raised to an average of 1.4 percent from 1.1 percent seen in September, indicating that the Fed may raise rates three times - a projection that echoes that of financial markets - instead of two times.
For 2018 the Fed expects the fed funds rate to average 2.1 percent, up from 1.9 percent previously forecast, and then to rise to 2.9 percent in 2019, up from 2.6 percent. The longer run rate was also raised to 3.0 percent from a previous 2.9 percent.
Despite the raised forecast for the fed funds rate, there were only minor changes to the forecast for economic growth and inflation.
The 2016 Gross Domestic Product forecast was raised to 1.9 percent from 1.8 percent and the 2017 forecast to 2.1 percent from 2.0 percent. The 2018 forecast was unchanged at 2.0 percent while the 2019 forecast was raised to 1.9 percent from 1.8 percent.
In the third quarter of this year the U.S. GDP grew by an annual rate of 1.6 percent, up from 1.3 percent in the second quarter.
The forecast for Personal Consumption Expenditure (PCE) inflation - the Fed's preferred gauge - for this year was raised to 1.5 percent from 1.3 percent while the forecasts for 2017, 2018 and 2019 were unchanged at 1.9 percent, 2.0 percent and 2.0 percent, respectively.
Headline inflation rose to 1.6 percent in October from 1.5 percent in September.
The forecasts for the unemployment rate were changed slightly, with the Fed expecting an average rate of 4.7 percent this year, down from 4.8 percent seen in September. For 2017 the jobless rate is seen declining further to 4.5 percent from 4.6 percent previously forecast while for 2018 the forecast was unchanged at 4.5 percent. For 2019 the forecast was cut to 4.5 percent from 4.6 percent.
In November the U.S. jobless rate fell to 4.6 percent from 4.9 percent for the lowest rate seen recorded since August 2007.
As in November, the Fed considers near-term risks to its economic outlook as "roughly balanced" and it order to determine the timing and size of future changes to the target range it will "assess realized and expected economic conditions" relative to its objectives of maximum employment and 2 percent inflation.
The Fed also reiterated that it expects economic conditions to evolve in a manner "that will warrant only gradual increases in the federal funds rate," which is likely to remain, for some time, below levels that are expected to prevail in the longer run.
The Board of Governors of the Federal Reserve System issued the following statement:
"Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo."
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