The announcement of the widely expected move came at the conclusion of the crucial two-day meeting of the policy making federal open market committee's.
In a historic move, America's central bank, the US Federal Reserve, for the first time in nearly a decade raised its key interest rate from a range of 0 per cent to 0.25 per cent to a range of 0.25 per cent to 0.5 per cent
Wednesday's rate hike though a small one, is seen as a sign of how much the US economy has healed since the 2007-2008 financial crisis. The central bank apparently believes the US economy is strong now and no longer needs crutches.
The announcement of the widely expected move came at the conclusion of the crucial two-day meeting of the policy making federal open market committee's (FOMC).
Explaining the Fed's historic decision, Janet Yellen, the first woman Fed Chair in the bank's 112-year history, told a press conference that Fed decided to move now because it felt it was on course to hit its goals.
"We decided to move at this time because we feel the conditions we set out, for a move, namely further improvement in the labour market and reasonable confidence that inflation would move back to 2 per cent in the medium term, we felt these conditions had been satisfied," she said.
"We have been concerned about the risks from the global economy and those risks persist, but the US economy has shown considerable strength," Yellen said. But "don't "overblow the significance of this first move," she said reminding reporters, "It's only 25 basis points. Monetary policy remains accommodative."
Earlier the Fed said in its statement: "The Committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably that confident inflation will rise."
Stocks rallied with the Dow rising over 100 points after the announcement, CNN reported. Investors were pleased to see that the Fed expects "only gradual increases" in interest rates next year.
The Fed put interest rates near zero during the financial crisis in December 2008 to help stimulate the economy and boost the collapsed housing market.
But the economy is now a lot healthier with unemployment at 5 per cent, half of the 10 per cent rate it hit in 2009 during the worst of the jobs crisis.
Over 12 million jobs have been added since the recession ended. Wages—which have barely grown during the recovery -- have also started to pick up recently.
On Wednesday, the Fed's committee improved its economic outlook. Compared to its last forecast in September, the Fed raised its expectations for economic growth next year to 2.4 per cent from 2.3 per cent.
It also lowered its projection for unemployment in 2016 to 4.7 per cent from 4.8 per cent.
The Fed still has low expectations for inflation -- a key measure when it decides to raise rates again.
The Fed's target for inflation is 2 per cent, but right now its close to zero. The Fed sees inflation inching up in the years to come, but not hitting 2 per cent until 2018.
Known as "liftoff," the Fed's action is expected to be the first of more rate increases that will probably come in 2016, CNN said.
The last rate hike was in June 2006 culminating a steady series of rate hikes that began two years earlier.