The US Federal Reserve last night raised interest rates, a move that was widely expected but still marked a milestone in the bank's shift from policies used to battle the 2007-2009 financial crisis and recession. 

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75-2%, the Fed dropped its pledge to keep rates low enough to stimulate the economy "for some time".

It also signaled it would tolerate inflation above its 2% target at least up to 2020. 

"The economy is doing very well," Fed Chairman Jerome Powell said in a press conference after the rate-setting Federal Open Market Committee released its unanimous policy statement after the end of a two-day meeting. 

"Most people who want to find jobs are finding them. Unemployment and inflation are low. The overall outlook for growth remains favourable," he added. 

Power added that continued steady rate increases would nurture the expansion, as the Fed approaches a sort of sweet spot with its employment and inflation goals largely met, the economy withstanding higher borrowing costs and no sign of a spike in inflation. 

The ongoing economic expansion coupled with solid job growth has pushed the Fed to raise rates seven times since late 2015, rendering the language of its previous policy statements outdated. 

Policymakers' fresh economic projections indicated a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously. 

They see another three rate increases next year, a pace unchanged from their projections in March. 

Powell also said the Fed would start holding news conferences after every policy meeting next year, which means a total of eight in 2019. The Fed chief currently holds four such events each year.

US Federal Reserve policymakers projected gross domestic product would grow 2.8% this year, slightly higher than previously forecast, and dip to 2.4% next year.

They also predicted that US inflation will hit 2.1% this year and remain there until 2020. 

That is a welcome change from recent years when Fed policymakers fretted about an inflation rate well below target.

The US unemployment rate, currently at an 18-year low of 3.8%, is expected to fall to 3.6% this year, compared to the 3.8% that the Fed projected in March. 

"The labour market has continued to strengthen - economic activity has been rising at a solid rate," the Fed said in its statement. 

"Household spending has picked up while business fixed investment has continued to grow strongly," it added. 

The Fed's short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in its battle in recent years to return monetary policy to a normal footing. 

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as "accommodative," with gradual rate increases likely warranted as the economy enters a 10th year of growth in a row. 

Garret Grogan, Global Head of Trading at Bank of Ireland Global Markets, said initial market reaction to the Federal rate rise saw the dollar strengthen.

But those dollar gains quickly reversed as attention turned to the fact that the FOMC also removed one projected rate increase from their 2020 estimate, suggesting a more balanced approach going forward. 

During his press conference Chairman Powell also played down the risk of accelerating inflation. 

"With one Central Bank meeting out of the way, market focus has quickly moved onto today’s ECB meeting where the is a chance that they will deliver a more concrete message around the removal of monetary stimulus, which would be a boost for the euro," Mr Grogan added.