The Federal Reserve Bank announced on Wednesday that it has increased interest rates by a half a percentage point—the largest increase since 2000—with the goal of cooling inflation, which has been increasing at the fastest rate in 40 years, the New York Times reported. The Fed also announced a plan to shrink its massive bond holdings. 

According to the Times, by shrinking its nearly $9 trillion balance sheet at the same time that it raises the rates, the Fed is quickly withdrawing support from the economy. The Times predicted that both policy changes would be likely to cause upheavals through markets and the economy as money becomes more expensive to borrow. 

At a press conference following the announcement, Fed Chair Jerome H. Powell said that “inflation is much too high” and that the Fed is “moving expeditiously to bring it back down.” 

He mentioned  that the Fed may continue increasing rates by larger than normal increments, saying, “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.” 

In the Federal Open Market Committee statement for May, the committee said, “Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” It added  that the “lockdowns in China are likely to exacerbate supply chain disruptions,” and that the invasion of Ukraine “and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. ...The committee is highly attentive to inflation risks.” 

According to the Times, in 2021, policymakers at the Fed hoped that inflation would normalize on its own as supply shortages moderated and  the economy evened out following early-pandemic disruptions. But there has been no return to normalcy, and inflation has continued to accelerate.  

The Fed plans to reduce the size of its balance sheet beginning in June by allowing securities to mature without reinvestment. It said that it will ultimately let up to $60 billion in Treasury debt expire each month, along with $35 billion in mortgage-backed debt. That plan will be fully phased as of September. 

According to the Times, the Fed’s plan to reduce its holdings could help to cool the housing market as it lifts longer-term borrowing costs, reinforcing the effect of the central bank’s interest rate increases. The Fed’s anticipated moves have already begun to push mortgage rates higher.