The US Federal Reserve (Fed) increased the short-term interest rate by 0.25 percentage point on Tuesday, the second increase since the end of June.

The US federal funds rate, which commercial banks charge each other overnight, is raised to 1.5 percent, still the lowest level in more than 40 years. The federal funds rate had been at a 46- year low of 1 percent just six weeks ago when the Fed raised it to 1.25 percent, the first increase in four years.

A statement released by the US Federal Open Market Committee ( FOMC), the Fed's policy-making body, said that US Fed believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.

It also admitted that output growth has moderated and the pace of improvement in labor market conditions has slowed in recent months. But it said that this softness likely owes importantly to the substantial rise in energy prices.

However, the statement said that the US economy appears poised to resume a stronger pace of expansion going forward.

The FOMC "perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal," the statement said. "With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."

Meanwhile, the US Fed stressed that it will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

The Fed's action to raise the interest rate was taken at a time when US economic growth slowed in the middle of the year and the inflationary pressure increased resulting mainly from soaring oil prices which hit highest point in more than 20 years.