The Fed is raising interest rates for the first time since 2018

Federal Reserve officials on Wednesday voted to raise interest rates and promised six more hikes by the end of the year - the most aggressive pace in more than 15 years - to rein in inflation, which is at its highest level in four decades.

The Fed will hike interest rates by a quarter of a point to a range of 0.25% to 0.5% - the first rate hike since 2018.

Officials signaled they expect to hike the rate to almost 2% by the end of this year - slightly higher than the level before the US economy's pandemic two years ago when they cut interest rates to near zero. The median of the projections shows that the interest rate will rise to around 2.75% by the end of 2023, which would mean the highest level since 2008.

The Fed's post-meeting statement pointed to growing concerns about inflation, which initially appeared to be related to pandemic-related tightening over the past year but has since widened.

"Looking around the table at today's meeting, I saw a committee that is acutely aware of the need to return the economy to price stability and committed to using our tools to do just that," the Fed said -Chairman Jerome Powell at a news conference Wednesday following the Fed's first fully in-person meeting in two years.

Powell expressed concern that inflation could rise further as the job market is at a record vacancy rate and wages are rising at the fastest pace in years. "It's a very, very tight job market - tight to an unhealthy degree, I would say," he said.

Major US stock indices rallied after Powell began his speech and closed higher at the end of the day. The Dow Jones Industrial Average rose 518.76 points, or 1.5%, to 34063.10 points. The yield on the benchmark 10-year Treasury note rose to 2.185%, compared to 2.16% on Tuesday and the highest since May 2019.

The Federal Open Market Committee approved the rate hike by an 8-to-1 vote, with the President of the St. Louis Fed James Bullard took a different view, arguing for a bigger hike of half a percentage point.

Powell said the Fed could finalize a plan to trim its $9 trillion portfolio of securities at its next meeting on May 3-4 and implement it shortly thereafter. The central bank ended its long-running asset purchase program last week.

The new projections show that officials expect interest rates to rise at a much faster pace than in December, when most forecast three quarter-point rate hikes this year, and significantly faster compared to a series of nine rate hikes between 2015 and 2018 That would be more comparable to the 2004-2006 period when the Fed raised interest rates 17 times in a row.

At the same time, most Fed officials have indicated that they do not expect interest rates to rise above 3% in the next few years. "The rhetoric is 'do whatever it takes' but the forecast is 'hope for the best,'" said Vincent Reinhart, chief economist at Dreyfus and Mellon.

The federal funds rate, an overnight rate for lending between banks, affects other borrowing costs for consumers and businesses throughout the economy, including interest rates on mortgages, credit cards, savings accounts, car loans, and corporate debt. Raising interest rates tends to discourage spending, while lowering interest rates encourages borrowing.

How much other interest rates will rise depends on how investors, companies and households react.

The Federal Reserve's decision on Wednesday marked a drastic reversal from just two years ago, when it cut interest rates to near zero and launched a series of programs to calm markets and support the economy as Covid-19 wreaked havoc paralyzed the economy. The pandemic triggered a severe two-month recession and record-breaking job losses in 2020.

Since then, economic output has recovered thanks to massive government stimulus programs and vaccinations, and inflation skyrocketed a year ago. The latest episode is a far cry from the seven years that the Fed kept interest rates close to zero following the 2008 financial crisis.