* Fed boosts benchmark rate 0.25 percentage point
* Dollar drops, Wall Street extends gains after rate hike
* Inflation worries still support gold, despite mild data
(New throughout, updates prices, market activity and comments) NEW YORK/LONDON, Dec 13 (Reuters) - Gold prices rose on Wednesday, extending gains to 1 percent as the dollar fell after the U.S. Federal Reserve raised interest rates as expected but left its outlook unchanged for coming years. The spot gold price rallied to $1,256.87 after the Fed raised its benchmark interest rates by 25 basis points, or a quarter of a percentage point. Having raised its benchmark overnight lending rate three times this year, the Fed projected three more hikes in each of 2018 and 2019 before a long-run level of 2.8 percent is reached. That outlook is unchanged from the last round of forecasts in September. The dollar index against a basket of six major
currencies dropped as low as 93.596. A
weaker dollar generally boosts the price of dollar-denominated gold. "Economic activity has been rising at a solid rate ... job gains have been solid," the Fed's policy-setting committee said in a statement announcing the federal funds rate had been lifted to a target range of 1.25 percent to 1.50 percent.
Spot gold was up 1 percent at $1,255.38 an ounce by
4:13PM EST (21:13 GMT).
U.S. gold futures for February delivery settled up
$6.90, or 0.6 percent, at $1,248.60 per ounce. Traders said inflation fears also supported gold's price, even though inflation data released early in the session was mild. "From the price action in gold today, the latest price hike isn't going to quell people's inflation expectations," said Michael Matousek, head trader at U.S. Global Investors in San Antonio. "Gold is now in a transitional period. We are coming from an environment of no inflation to finally trying to get a little inflation." Gold is highly sensitive to rising rates because they push up bond yields, reducing the appeal of non-yielding bullion. Rising interest rates also tend to boost the dollar, making gold more expensive for holders of other currencies. Outgoing Chair Janet Yellen's successor, Fed Governor Jerome Powell, has hinted that he has a cautious approach to rate increases. U.S. stocks extended their gains after the release of the Fed policy statement. Treasury yields dropped to session lows and the U.S. dollar weakened against a basket of currencies.
In other precious metals, silver silver was up 2.1
percent at $16.06 an ounce after earlier hitting a five-month low of $15.59.
Platinum was up 1 percent at $885 an ounce after
touching its lowest since February 2016 at $868.80 on Tuesday.
Palladium was up 0.4 percent at $1,016.80 an ounce.
(Additional reporting by Apeksha Nair in Bengaluru; Editing by Gareth Jones, Diane Craft and David Gregorio)