Believing the economy is finally strong enough, Federal Reserve Board Chair Janet Yellen on Wednesday announced a quarter of a percent increase in the interest rate, which is expected to push inflation to a targeted 2 percent by 2018.
The one-fourth of a point rise signals continued economic recovery since the downturn in 2008.
Seven years ago the Federal Reserve cut the interest rate to close to zero to ease the economic hardship of millions of Americans, Yellen said. Interest rates have remained at about zero and are at a current .04 percent.
"The economic recovery has clearly come a long way, though it is not yet complete," Yellen said during a press conference Wednesday afternoon.
The process of normalizing interest rates is likely to proceed gradually, she said.
Inflation continues to run below the objective, she said, and is also expected to slowly trend upward.
The Federal Reserve's Open Market Committee projects inflation to be very low this year, largely reflecting lower prices for energy and energy imports, Yellen said. Inflation should rise to 1.9 percent in 2017 and 2 percent in 2018, she said.
"The anticipation is that ongoing economic growth and improvement in labor conditions will return inflation to a 2 percent objective," she said.
In September, Yellen said interest rates would remain at about zero, as global economic uncertainty outweighed modest increases in housing and jobs, and risks abroad.
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Although development abroad still poses a risk to economic growth, that risk has lessened since the summer, she said.
The federal funds rate target is being increased now due to a lessening of those transitory factors and favorable economic conditions, according to Yellen.
The labor market has shown significant improvement, with 2.3 million jobs added and the unemployment rate at 5 percent in November, she said. The gross domestic product has increased 2.25 percent.
Net exports have been restrained by foreign growth, but this weakness has been offset by a solid expansion in domestic spending, she said. Purchases of new motor vehicles have been particularly strong, though the level of new home building remains low.
Outside of the drilling and mining sector, business investment has posted solid gains, Yellen said.
The committee expects economic activity will continue to expand at a moderate pace, she said.