Fed officials voted 8-1 on Wednesday to raise the target level for the rate, a key benchmark for consumer and business lending, to between 1 percent and 1.25 percent. A neutral rate implies no negative effect on growth.
Federal Reserve chair Janet Yellen said the rate increase reflected the "progress the economy has made and is expected to make towards the maximum employment and price stability objectives assigned to us by law".
The Fed's preferred measure of underlying inflation has retreated to 1.5 per cent, from 1.8 per cent earlier this year, and has run below the central bank's 2 per cent target for more than five years.
But they downgraded their expectation for inflation to 1.6 percent this year.
The chart below shows gold's price activity from 9:00 a.m. PST to 2.30 p.m. PST on Wednesday.
Meanwhile, the rate of inflation over the past 12 months has slowed to 1.9% in May from 2.7% just in February. USA data showed an unexpectedly large weekly build in US gasoline inventories and International Energy Agency (IEA) data projected a big increase in non-OPEC output in 2018.
The precious metal often drops when rates rise, as some investors back away from the metal because it doesn't pay interest.
In the wake of the financial crisis, the central bank added Treasury securities and mortgage-backed securities to its balance sheet. This rate is a 25 basis points increase over the current one of 0.91 per cent. Most analysts believe the Fed will raise the federal funds rate what banks charge each other for short-term loans for the second time this year.
The Fed raised interest rates for the first time since the crisis in December 2015. The Fed foresees one additional rate hike this year but gave no hint of when that might occur.
USA government bonds pulled back Thursday, lifting the yield on the 10-year Treasury note from its lowest level of the year, amid continued fallout from Wednesday's Federal Reserve meeting. The consumer price index declined in May for the second time in three months, the Labor Department said Wednesday. The S&P and NASDAQ both fell after the announcement, and the Dow shuddered before recovering later in the day.
After a rally to the $1,265 area, gold came under renewed selling pressure in Europe on Thursday as the dollar gained fresh support against major currencies with EUR/USD sliding to the 1.1150 area.