The Federal Reserve moved to tamp down soaring inflation in the US on Wednesday, announcing the sharpest rise in interest rates in over 20 years.

The Fed’s benchmark interest rate was raised by 0.5 percentage points to a target rate range of between 0.75% and 1%. The hike is the largest since 2000 and follows a 0.25 percentage point increase in March, the first increase since December 2018.

More rate rises are expected. The Economist Intelligence Unit expects the Fed to raise rates seven times in 2022, reaching 2.9% in early 2023. Starting in June, officials also plan to shrink their $9tn asset portfolio, a policy move that will further push up borrowing costs.

Rates were cut to near zero in March 2020 when the pandemic hit the US but they were already low and years of low rates left the US and other countries ill-prepared for a sudden rise in inflation. Until recently the Fed had dismissed rising prices as “transitory” and expected them to fall as economies recovered from the pandemic.

All that has now changed. Making the case for sharper rate raises last month, the Fed chair, Jerome Powell, said: “It’s absolutely essential to restore price stability. Economies don’t work without price stability.”

Thanks in large part to the unprecedented impact of the coronavirus on the global economy, inflation is now running at a 40-year high in the US. In March, the Consumer Price Index (CPI) was 8.5% higher than it was a year ago, driven up by rising prices for gasoline, shelter, and food. The increasing costs of essential goods and services are now outstripping average wage gains.

The impact of the Fed’s policy is already being felt in the wider economy. Since the start of the year, mortgage rates have climbed at their fastest pace in decades, rising nearly two percentage points. Some hot property markets have started to cool as a result. The impact of tighter monetary policy has also triggered selloffs in the stock markets.

Powell will give details about the Fed’s decision at a press conference on Wednesday afternoon.

More details soon …