The Federal Reserve has intensified its fight against the worst inflation in 40 years by raising its benchmark short-term interest rate by half a percentage point — its most aggressive move since 2000.

The increase in the Fed’s key rate raised it to a range of 0.75% to 1%, the highest point since the pandemic struck two years ago.

The Fed also announced that it will start reducing its huge 9 trillion dollar balance sheet, which consists mainly of Treasury and mortgage bonds.

Those holdings more than doubled after the pandemic recession hit as the Fed bought trillions in bonds to try to hold down long-term borrowing rates.

Reducing the Fed’s holdings will have the effect of further raising loan costs throughout the economy.

All told, the Fed’s credit tightening will mean higher loan rates for many consumers and businesses over time, including for mortgages, credit cards and car loans.

Speaking at a news conference, chairman Jerome Powell made clear that further large rate hikes are coming.

He said: “There is a broad sense on the committee that additional (half-point) increases should be on the table in the next couple of meetings.”

But Mr Powell also sought to downplay any speculation that the Fed might be considering a rate hike as high as three-quarters of a percentage point.

“A 75-basis-point hike is not something that the committee is actively considering,” he said.

With prices for food, energy and consumer goods accelerating, the Fed’s goal is to cool spending — and economic growth — by making it more expensive for individuals and businesses to borrow.

The central bank hopes that higher borrowing costs will slow spending enough to tame inflation yet not so much as to cause a recession.

It will be a delicate balancing act. The Fed has endured widespread criticism that it was too slow to start tightening credit, and many economists are sceptical that it can avoid causing a recession.

In their statement on Wednesday, the central bank’s policymakers said they are “highly attentive to inflation risks”.

The statement also noted that Russia’s invasion of Ukraine is worsening inflationary pressures by raising oil and food prices. It added that “Covid-related lockdowns in China are likely to exacerbate supply chain disruptions” which could further boost inflation.

Inflation, according to the Fed’s preferred gauge, reached 6.6% last month, the highest point in four decades.

Inflation has been accelerated by a combination of robust consumer spending, chronic supply bottlenecks and sharply higher gas and food prices, exacerbated by Russia’s war against Ukraine.

Mr Powell has said he wants to quickly raise the Fed’s rate to a level that neither stimulates nor restrains economic growth. Fed officials have suggested that they will reach that point, which the Fed says is about 2.4%, by the year’s end.

The Fed’s credit tightening is already having some effect on the economy.

Sales of existing homes sank 2.7% from February to March, reflecting a surge in mortgage rates related, in part, to the Fed’s planned rate hikes.

The average rate on a 30-year mortgage has jumped 2% since the start of the year, to 5.1%.