The increase was largely expected, given previous comments from Federal Reserve Chairman Alan Greenspan, who has indicated that inflationary pressures were not expected to be a problem. The interest-rate hike is intended to keep inflation at bay and prevent the economy from overheating.
Market strategists said the announcement was in line with expectations.
"The Fed said rate hikes would be gradual and over time. No one expected rates to go up dramatically," said Philip Dow, a market strategist with RBC Dain Rauscher. He added that the board had previously indicated it would only raise rates by quarter-point increments.
"With underlying inflation still expected to be relatively low, (the Fed) believes that policy accommodation can be removed at a pace that is likely to be measured," according to a statement from the Federal Reserve. "Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."
Prior to Wednesday's increase, the last time the Federal Reserve raised the rate was in May 2000, when the rate hit 6.5 percent.
But times have changed dramatically since then. That year, the economy slumped into a prolonged downturn from which it's still emerging, and the dot-com boom came crashing to an end. Interest rates fell to 1 percent in June of last year, as the Fed.
The 1 percent interest rate had marked the lowest rate in 45 years.
Changes to the federal funds rate--the overnight discount rate banks are charged by the Fed to meet their short-term funding needs--eventually trickle down to the interest rates businesses and consumers pay. Some economists and industry watchers are concerned that the rise in the overnight interest rate will temper the gains that have been made in the economy, particularly in the depressed technology sector.
"Corporations have a lot of cash on their balance sheet, so there is no real need to raise money (and be subject to the rate hikes)," Dow said, noting the rate increase should not have a huge effect on any spending plans by technology customers.