The new target range for the federal funds rate is 1 1/2 percent to 1 3/4 percent.
The increase keeps benchmark rates at a historically low level. The Fed said overall inflation was below 2 percent and expects it to stabilize around the 2 percent mark over the medium term.
"Job gains have been strong in recent months, and the unemployment rate has stayed low," the Federal Open Market Committee said in its announcement. "The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong.
"Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely."
The Fed indicated it will make three rate hikes this year. Interest rates exceeded 5 percent through much of the 1990s, but were near zero in the years after the start of the 21st century. Wednesday's rate change is the sixth since 2015.
Higher rates serve savers, as interest rates on deposits would rise, and mean higher rates for borrowers. As banks are charged more for money, they can raise rates on small business loans, credit cards and mortgages. Many credit card loans already come with a variable interest rate pegged to Fed rate increases. Companies that seek expansion or carry a lot of debt could suffer with additional hikes by the central bank.
The Federal Reserve faces the question of how quickly to raise rates without spurring too much inflation or slowing a growing U.S. economy. Since the last meeting in December, Congress passed a $3.5 billion tax cut and a two-year, $300 billion funding increase.