In its first policy meeting under new Fed chief Jerome Powell, the US central bank indicated that inflation should finally move higher after years below its 2 percent target and that the economy had recently gained momentum.
The Fed said it expects to raise rates twice more this year.
'The Summary of Economic Projections is interesting: although the median forecast of GDP growth was revised higher and unemployment rate was revised lower, the PCE forecast did not change for the next two years, ' said Peng Zhou, managing director of derivatives and quantitative strategy at Sun Life Investment Management.
The better news is that these strong improvements in overall growth and the labour market would bring only a gentle lift in U.S. inflation to slightly above the Fed's 2.0% inflation target. All 104 economists polled by Reuters from March 5-13 said the Fed would increase borrowing costs this week.
Higher interest rates in the United States are usually followed by an outflow of foreign funds from upcoming economies such as India, which are considered to be 'risky'.
Fed officials signaled in several ways that they see the economy strengthening.
The latest bundle of quarterly forecasts shows that Fed representatives are divided on the prospects for the base interest rate in 2018.
According to Reuters, following the announcement stocks extended their gains, while the dollar fell. "The long term average real return on a United States ten year treasury bond runs around 2.5%".
The Fed anticipates hiking rates three more times in 2018, part of an ongoing move away from the extraordinary measures it took to stimulate the economy during and after the Great Recession.
"The economic outlook has strengthened in recent months", Powell said during a press conference on Wednesday.
The head of the U.S. central bank says members of its rate-setting committee have reported "concerns" among business leaders over the impact of President Trump's protectionist agenda.
"There's no thought that changes in trade policy should have an effect on the current outlook", he said. Three rate hikes is the baseline for 2018, however, we can see as many as three rate hikes in 2019, up from two.
The Fed lifted up its estimate of the long run neutral interest rates to 2.9% from 2.8% in December.
In addition, job gains will drive the unemployment rate down to 3.6 percent next year, below the previous 3.9 percent estimate, and stay there in 2020. "The inflation forecast increased only slightly".
Powell, a Republican with a reputation for bipartisan work in Washington, was careful not to criticize President Donald Trump or congressional leaders, but he did say the tax cuts are unlikely to lead to the 3 percent growth the White House is touting.