Rate hike comes as Federal Reserve Chair Jerome Powell says recent collapse of the Silicon Valley Bank is not indicative of wider weaknesses in the banking system.
The US Federal Reserve has raised its benchmark lending rate, as it sought to strike a balance between curbing high inflation and averting further upheaval in the commercial banking sector.
The 0.25 percent increase, which was in line with expectations, lifts the target range to 4.75-5.00 percent at the end of a two-day policy meeting.
In a statement on Wednesday, the Fed said recent banking sector developments "are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation."
The rate hike comes as Federal Reserve Chair Jerome Powell said the collapse of the Silicon Valley Bank (SVB) is not indicative of wider weaknesses in the banking system, although he criticised the management of the bank saying it "failed badly" in running the company.
"These are not weaknesses running that are running broadly through the banking system," Powell told a press conference after the Fed's latest policy meeting.
The policy-setting Federal Open Market Committee (FOMC) earlier said that "some additional policy firming may be appropriate" to get to a stance that is sufficiently restrictive to bring inflation down.
The latest increase was the same size as the central bank's previous rate decision in February.
It comes after two weeks of market turmoil following the collapse of three regional lenders.
Wednesday's decision underscores the Fed's determination to tackle inflation, which remains stubbornly above policymakers' long-term annual target of two percent despite an effort to lower price increases.
The implosions of SVB and two other regional lenders pummeled banking stocks around the world last week, with Swiss investment bank Credit Suisse swallowed up by regional rival UBS after its shares sank to a record low.
READ MORE: Central banks boost global dollar liquidity after Credit Suisse rescue
'Risk to both sides'
Asian stock markets and most European indices rose ahead of the Fed's decision. Wall Street stocks picked up shortly after the Fed's announcement.
The combination of hot US economic data at the start of the year and uncertainty in the banking sector has led most analysts to predict the Fed will continue with a more modest hiking cycle than was previously expected.
"After the recent news, the recent developments in the financial markets, we now see a kind of risk to both sides," Stephen Juneau, senior US economist at Bank of America Global Research, told AFP ahead of the decision.
Treasury Secretary Janet Yellen said Tuesday that the US banking sector was "stabilizing" after authorities stepped in to protect deposits following the failures of SVB and Signature Bank.
But she conceded that "similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion."
Yellen's comments underscored this week's relief rally in the stock markets, along with actions by the Fed and other major central banks to improve lenders' access to liquidity.
On Wednesday, the Fed also updated its economic projections, slightly lowering its 2023 GDP growth projections 2023 to 0.4 percent from 0.5 percent in December.
The Fed's announcement follows on the heels of the European Central Bank's decision last week to raise rates by 0.5 percentage points.
ECB chief Christine Lagarde warned on Wednesday that the eurozone's monetary policymakers "will still have ground to cover to make sure that inflation pressures are stamped out."
She said the recent banking turmoil could add to "downside risks" in the single currency area.
READ MORE: UBS agrees to take over Credit Suisse for over $3B