It is part of a gradual process to wean the economy from extraordinarily low rates that are no longer viewed as necessary to keep the economy afloat.
On Tuesday, Fed Chairman Alan Greenspan and his Federal Open Market Committee colleagues - the group that sets interest-rate policy in the United States - increased the target for the federal funds rate to 1.75%, from 1.5%.
The funds rate is the interest banks charge each other on overnight loans and is the Fed's primary tool for influencing economic activity.
As a result of the Fed's decision to push up the funds rate, commercial banks are expected to increase by a corresponding amount their prime lending rate for many short-term consumer and business loans to 4.75%, from 4.50%.
Some analysts believe the funds
rate will rise to 2% by year's end
The Fed's rate-raising campaign began in June when the central bank ordered its first rate increase in four years.
That was followed by a rate increase in August and then by another on Tuesday.
Fed policy-makers stuck to their view that future rate increases would be gradual. It said rates could be raised at "a pace that is likely to be measured" given that inflation is expected to remain relatively low.
On the economy, the Fed said economic growth "appears to have regained some traction" and "labour market conditions have improved modestly".
Despite the rise in energy prices, inflation has eased in recent months, the Fed added.
The vote was unanimous.
The Fed's rate increase comes with elections just six weeks away.
Analysts believe the funds rate will rise to 2% by the end of this year. Economists, however, have mixed opinions on how additional rate increases will unfold after Tuesday's meeting.
Some believe the Fed will boost rates again at its 10 November meeting. Others believe the Fed might take a breather at the November meeting, but raise rates in December.