(Bloomberg) -- The Federal Reserve raised interest rates for thefirst time in almost a decade in a widely telegraphed move whilesignaling that the pace of subsequent increases will be “gradual”and in line with previous projections.

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The Federal Open Market Committee unanimously voted to set thenew target range for the federal funds rate at 0.25 percent to 0.5percent, up from zero to 0.25 percent. Policy makers separatelyforecast an appropriate rate of 1.375 percent at the end of 2016,the same as September, implying four quarter-point increases in thetarget range next year, based on the median number from 17officials.

“The committee judges that there has been considerableimprovement in labor market conditions this year, andit is reasonably confident that inflation will rise, over themedium term, to its 2 percent objective,” the FOMC said in astatement Wednesday following a two-day meeting in Washington. TheFed said it raised rates “given the economic outlook, andrecognizing the time it takes for policy actions to affect futureeconomic outcomes.”

The increase draws to a close an unprecedented period ofrecord-low rates that were part of extraordinary and controversialFed policies designed to stimulate the U.S. economy in the wake ofthe most devastating financial crisis since the Great Depression.The FOMC lowered its benchmark rate to near zero in December 2008,three months after the collapse of investment bank Lehman BrothersHoldings Inc. and 10 months before unemployment in the U.S. peakedat 10 percent.

While the vote was unanimous, the rate forecasts show that twoofficials among the full group of voters and non-voters sawno rate increases as appropriate in2015, without identifying them.

“The committee expects that economic conditions will evolve in amanner that will warrant only gradual increases in the federalfunds rate,” the FOMC said. “The actual path of the federal fundsrate will depend on the economic outlook as informed by incomingdata.”

Balance sheet

The FOMC said it expects to maintain the size of its balancesheet “until normalization of the level of the federal funds rateis well under way.”

The quarter-point increase in the target fed funds rate, theovernight interbank lending rate that influences other borrowingcosts in the economy, was forecast by 102 of 105 analysts surveyedby Bloomberg News.

The Fed gave a largely positive assessment of the U.S. economy,saying that expansion continued at a “moderate pace” and that a“range” of job-market indicators “confirms that underutilization oflabor resources has diminished appreciably since early thisyear.”

The central bank also said that the risks to the outlook foreconomic activity and the labor market are now “balanced,” changingfrom a previous reference to being “nearly balanced.”

The Fed said monetary policy is still “accommodative after thisincrease, thereby supporting further improvement in labor marketconditions and a return to 2 percent inflation.”

The central bank acknowledged the state of low inflation, sayingthat it plans to “carefully monitor actual and expected progresstoward” its 2 percent.

As part of the decision, the Fed increased the interest it payson overnight reverse repos to 0.25 percent from 0.05 percent to puta floor at the lower end of the range. It also raised the interestit pays on excess reserves held at the Fed to 0.5 percent from 0.25percent to mark the upper end of the range.

In a related move, the Fed’s Board of Governors unanimouslyvoted to raise the discount rate, which covers direct loans tobanks, by a quarter point to 1 percent.

Press conference

Fed Chair Janet Yellen is holding a press conference inWashington.

In addition to setting rock-bottom short-term interest ratesduring the crisis, the Fed engaged in three rounds of bondpurchases aimed at suppressing long-term rates to stimulateborrowing and spending. Officials also provided unusually explicitguidance, assuring investors for years they intended to keep rateslow well into the future.

Prior to 2008, the effective fed funds rate had never droppedbelow 0.63 percent, according to data compiled by the St. Louis Feddating back to 1954.

In Dec. 3 remarks Yellen drew attention to how much the economyhad mended since the darkest days of the recession, noting thatunemployment had fallen by half to 5 percent, close to Fedestimates for the long-run normal level.

Still, the recovery has been disappointing for many. Householdincomes remain lower than they were a decade ago when adjusted forinflation, and wages have climbed only sluggishly even as firmshired back workers. Hourly earnings have risen by about an average2.2 percent annual pace over the past seven years, compared with3.3 percent in the 20 years through 2008.

GDP forecast

Gross domestic product expansion hasn’t topped 3 percent sincethe third quarter of 2010, on a year-on-year basis. It’s projectedto grow 2.2 percent in the three months through December.

Representing another symptom of weakness, inflation hasn’treached the Fed’s 2 percent target since April 2012. The coreversion of the central bank’s preferred gauge of price pressures,which strips out volatile energy and food prices, was just 1.3percent in the 12 months through October.

Yellen said Dec. 3 that continued labor-market improvement thisyear had bolstered her confidence that inflation would move backtoward the Fed’s 2 percent goal.

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