The decision to raise rates comes as the USA unemployment rate hovers at 3.8% - the lowest rate in almost two decades - and inflation, which lagged the Fed's 2% target for years, shows signs of starting to pick up.
The latest increase will bring the benchmark federal-funds rate to a range between 1.75% and 2%.
Interest rates are expected to increase to 3.1% next year, up from the previous forecast of 2.9%. "Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly". The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%. This is still a solid annual rate, but a marked declaration from the 3.2% year over year in March.
Two additional rate hikes are predicted this year, for a total of four.
The unemployment rate is 3.8%, the lowest since 2000 and tied for the lowest reading since 1969. Inflation by the Fed's preferred gauge would hit its 2 percent target this year and edge up to 2.1 percent over the next two years. If the CPI reached these levels, the Fed would be raising rates at a much faster level.
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.
This will raise borrowing costs for credit cards, auto financing, mortgages, and other loans, but help savers earn more interest on their deposits.
That index now is at 2 per cent but other measures of consumer and producer prices have accelerated, pushed by rising fuel prices, as well as metals prices that could be the result of the steep import tariffs President Donald Trump imposed.
The broader S&P 500 tumbled by 0.4 per cent, while the technology-focused Nasdaq index dropped by a slight 0.1 per cent.
"The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in USA history while meeting inflation and employment objectives", said Stephen Gallagher, chief US economist at Societe Generale.
Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory. It also forecast an even lower unemployment rate of 3.5% for 2019 and 2020.