At the end of its May meeting on Wednesday, the Fed raised benchmark interest rates by half a percentage point, taking the target rate from 0.75 percent to 1 percent, in its biggest single rate increase since May 2000.
The central bank said it would also reduce its $9 trillion balance sheet, which spiked during the pandemic as the Fed gobbled up bonds to pump money into the economy.
Reducing the Fed's balance sheet holdings will further raise loan costs throughout the economy, as will the higher benchmark rate -- but the Fed wishes the moves will cancel inflation, which hit 8.5 percent in March.
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Following the announcement of the rate hike, Fed Chair Jerome Powell opened a press conference with an unusual direct address to the American people, saying: "Inflation is much too high, and we understand the hardship it is causing, and we are moving expeditiously to bring it back down."
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"We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses," he added.
The moves announced Wednesday were broadly foreseen, and the major stock indexes rose slightly after the announcement. At 2.10pm, the Dow was up 150 points on the day.
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Markets jumped even higher as Powell downplayed the likelihood of an even larger rate increase than the one just announced.
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"A 75-basis-point hike is not something that the committee is actively considering," he said, allaying concerns about a massive rate hike at the next meeting in June.
The S&P 500 increased by 2 percent soon after Powell's remarks. The Dow gained 690 points, or 2 percent, and the Nasdaq gained 2.15 percent.
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The Fed's goal is to engineer a "soft landing" in which it reins in inflation while avoiding a contraction in economic activity.
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Nevertheless, many analysts assume that the central bank may have waited too long to take action on rising consumer prices, which Powell overlooked as "transitory" for much of last year.
The worries have aggravated with Russia's invasion of Ukraine and its effect on energy and key food commodity prices.
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China’s increasingly stricter lockdown efforts due to rising COVID-19 cases have also added worries about slower economic growth due to supply problems and shipping backlogs.
While higher interest rates could assist in containing rising inflation, they will also increase the cost of borrowing for many Americans, affecting everything from mortgage rates to credit card interest.
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