The Federal Reserve raised interest rates by half a percentage point on Wednesday — the biggest increase to short-term borrowing costs in more than two decades — and alerted consumers that more hikes of this size are yet to come, marking the U.S. central bank’s most aggressive moves yet to contain the highest inflation in 40 years.
“Inflation is much too high, and we understand the hardship that it is causing,” said Fed Chair Jerome Powell in a post-meeting press conference. “There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings.”
Officials also announced plans to start trimming the massive near $9 trillion bond portfolio that ballooned during the coronavirus crisis on June 1. Over the course of three months, they’ll work their way up to letting $60 billion worth of Treasurys and $35 billion in mortgage-backed securities roll off their balance sheet at maturity each month.
The twin moves are designed to reverse an inflationary trend that has seen consumer prices rise at more than 8% annually, the highest pace in four decades. It is also an acknowledgment that the Fed fell behind the curve last year as inflation began to accelerate and officials continued to call inflation “transitory.”
“The committee is highly attentive to inflation risks,” officials said in their post-meeting statement. “The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.”
With prices for food, energy and consumer goods accelerating, the Fed’s goal is to cool spending — and economic growth — by making it more expensive for individuals and businesses to borrow. The central bank hopes that higher costs for mortgages, credit cards and auto loans will slow spending enough to tame inflation yet not so much as to cause a recession.