The Fed foresees one additional rate hike this year but gave no hint of when that might occur.
The Fed said that while inflation has been low, it is expected to soon hit the 2 percent target.
That said, much of the market's concern was born in the hours prior to the Fed statement, when data showed that core US inflation eased to a two-year low 1.7% and retail sales only grew at a 0.3% pace.
Fed officials voted 8-1 to raise the federal funds rate to a range of 1 to 1.25 percent.
The Fed has announced that at some point this year it is likely to begin the process of gradually reducing its massive holdings of USA treasuries and mortgage backed securities, now worth $4.5 trillion.
But at least for now, the bond market doesn't care. This has in turn given the Fed the confidence to start selling off part of the more than $4.5 trillion of holdings that it amassed at the time of and following the recession.
"The economy is doing well, is showing resilience", Yellen said at a quarterly news conference. Yellen stated that there is no specific fund rates level that could trigger the process of balance sheet normalization.
In Wednesday's poll, only five of 23 primary dealers expected a rate hike in September, compared with 10 of 18 dealers in the June 2 poll.
The move registered swiftly in markets, with the territory's one-month interbank rate, known as HIBOR, jumping the most in six months, and a gauge of property stocks in Hong Kong retreating more than 1 percent.
The median estimate of the long-run neutral rate, which is seen as the level of monetary policy that neither boosts nor slows the economy, was unchanged at 3.0 percent.
But the Fed's forecasts are only predictions and are frequently revised as its assessments evolve.
It said the rate increase and accompanying comments bolster our view that the fed funds rate is likely to normalise at 3.5% by 2020, and USA 10-year bond yields will rise back above 4%. Some also note that political paralysis in Washington has raised doubts about whether Congress will increase the nation's borrowing limit and pass a new budget.
Bond yields plunged by the most in a month following the data. If inflation doesn't pick up, he said, the Fed will find that raising rates and reducing its balance sheet is "going to be a hard manoeuvr".
The Fed has in recent weeks wrestled with contradictory signals from unemployment and inflation.
Analysts in recent weeks have become increasingly doubtful there would be a third rate increase later this year, as inflation, consumption and other economic data have indicated the weakness seen in the first quarter has continued.
'In any case, any acceleration in wages and inflation is likely to be gradual, meaning the Fed will be under little pressure to tighten policy in the next few months, ' she said.