The US Federal Reserve has hiked interest rates for the first time in nearly a decade, signalling faith that the US economy had largely overcome the wounds of the 2007-2009 financial crisis.

The US central bank's policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25% and 0.5%, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

US stocks, which had been modestly positive prior to the announcement, gained. The dollar advanced against the euro and yen, reversing the trend in foreign exchange markets prior to the decision.

Federal Reserve Chair Janet Yellen said the Fed's first rate increase since 2006 marks the "end of an extraordinary seven-year period" of easy-money policy begun in the Great Recession.

But she stressed that it was "important not to overblow the significance" of the quarter-point rate increase, saying Fed policy will remain accommodative over the medium term.

She said the move reflected the committee's confidence that the US economy would continue to strengthen, but said that while the recovery had come a long way it was not yet complete.

Ms Yellen said the committee expected economic activity would continue to expand at a moderate pace, as the Fed made "gradual adjustments in the stance of monetary policy".

In its policy statement the Fed said: "The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2% objective."

The decision was adopted unanimously.

The Fed made clear that the rate hike was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.
 

"In light of the current shortfall of inflation from 2%, 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 Fed said.

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7% next year and economic growth at 2.4%.

The statement and its promise of a gradual path represents a compromise between those who have been ready to raise rates for months and those who feel the economy is still at risk.

The median projected target interest rate for 2016 remained 1.375%, implying four quarter-point rate hikes next year.

To edge that rate from its current near-zero level to between 0.25% and 0.5%, the Fed said it would set the interest it pays banks on excess reserves at 0.5%, and said it would offer up to $2 trillion in reverse repurchase agreements, an aggressive figure that shows its resolve to pull rates higher.

Financial markets had expected the rate hike, bolstered by recent US data showing job growth continuing at a strong pace.

A 9 December Reuters poll showed the likelihood of a hike was 90%, with economists forecasting the federal funds rate to be 1% to 1.25% by the end of 2016 and 2.25% by the end of 2017.

The rate hike sets off an immediate test of new financial tools designed by the New York Fed for just this occasion, as well as a likely reshuffling of global capital as the reality of rising US rates sets in.

The impact on business and household borrowing costs is unclear. One of the issues policymakers will watch closely in coming days is how long-term mortgage rates, consumer loans and other forms of credit react to a rate hike meant not to slow an economic recovery but nurse monetary policy back to a more normal footing.

The Fed emphasised it would move gingerly into its tightening cycle. 

That was enough to produce a unanimous vote on the policy-setting Federal Open Market Committee, as even members who had argued publicly for delaying a rate hike delay went along with Fed Chair Janet Yellen and other policymakers.