WASHINGTON — For the first time in 22 years, the Federal Reserve on Wednesday pushed up interest rates by a full half-percentage point — a significant escalation of its efforts to get control of troublingly high inflation.
The Fed action will raise costs for new borrowers and increase interest payments that many households, already stressed by higher prices for food and gas, are making on existing home equity lines, credit cards and some other loans.
And that's likely just the beginning. Financial markets expect another half-point rate hike at the Fed's next meeting in mid-June, and possibly another one in August.
It's part of a likely yearlong campaign to cool the economy after what now looks like too much monetary stimulation during the COVID pandemic.
The goal, more easily stated than achieved, is to slow growth without triggering a recession.
In addition to raising rates, the central bank's main lever, the Fed plans on June 1 to put its bond-purchase stimulus program in reverse, further tightening financial conditions by adding upward pressure on long-term yields and mortgage rates.
Fed officials, facing widespread charges that they waited too long to raise rates, have been signaling for weeks that they want to move more aggressively in response to surging consumer prices, which jumped 8.5% in March from a year earlier.
That's the highest since 1981, and record numbers of consumers now say inflation is their family's top financial problem.
Mortgage rates already are up sharply in anticipation of Fed actions, and financing costs for autos and other loans also have crept higher. For retirees and other savers, the Fed rate hikes mean they will see higher returns on certificates of deposits and savings accounts, which have been minuscule for years.
Today the average yield on a one-year CD is just 0.22%, according to Bankrate.com, and that's up from 0.14% at the start of the year.
"Yeah, I am kind of devastated when I can't even get 1%," said Sherry Pietras, 64, a retired aerospace engineer in Huntington Beach, California.
For some economists, the concern is that the Fed, in its ramped-up campaign to get inflation back to its 2% target, will apply the economic brakes too hard. Others worry that the Fed will back off too soon at signs of trouble, and end up not doing enough to arrest high inflation.
"A mild recession may be the price that has to be paid to put inflation back in the box," said Greg McBride, Bankrate.com's chief financial analyst.
The U.S. economy grew last year at the fastest pace since 1984, and the job market has been resilient. But with the war in Ukraine and continuing supply-chain problems, not to mention lingering effects from the pandemic, the economy is showing signs of weakening.
Investors are nervous, evidenced by the sell-off in stock markets, and some measures of consumer sentiment today are as bad as they were during the Great Recession, despite relatively healthy household balance sheets and an unemployment rate that's near a half-century low.
In its policy statement Wednesday, the Fed noted that consumer spending and business investment remained strong, despite the downturn in economic activity in the first quarter.
The statement, however, warned that Russia's invasion of Ukraine and related events "are creating upward pressure on inflation and are likely to weigh on economic activity." What's more, it said, COVID lockdowns in China are likely to worsen supply chain problems.
The Dow rose upon the release of the Fed statement, as did the S&P 500 stock index, which fell 8.8% in the month of April, even as market participants awaited the news conference later in the afternoon with Fed Chair Jerome H. Powell.
Earlier in the year Powell and his colleagues had suggested they were likely to raise rates more gradually, a quarter-point at a time.
Now, the Fed appears determined to normalize monetary policy as fast as possible. Even with Wednesday's announcement, the Fed's main rate would still be below 1%. Most Fed officials think a normal, or neutral, rate, is about 2.5%.
The last time the Fed raised rates by a half percentage point was in May 2000, near the height of the so-called dot-com stock bubble, which burst that year and led to a relatively short recession in 2001.
