By Ann Saphir

WASHINGTON, (Reuters) – The Federal Reserve will raise interest rates by half a point Wednesday and begin reducing its balance sheet of $9 trillion. This is as the central banks of the United States intensify their efforts to lower high inflation.

Fed policymakers widely predicted a double-barreled Fed decision. This would raise the Fed’s target rate for short-term inflation to between 0.75% to 1% and put in motion plans to reduce its Treasuries portfolio and to cut mortgage-backed securities (MBS), by up to $95 billion per month.

Following the Fed’s last two-day meeting at noon EDT (1800 GMT), the Fed’s policy statement will be made public at 2 pm EDT (2200 GMT).

Markets have priced in further rate increases through this year and into next, including at least a couple more half-percentage-point hikes, as traders bet the central bank moves much more quickly than it had anticipated it would in March to get borrowing costs up to where they will start actively curbing inflation.

The Fed Chair Jerome Powell will be giving the most detailed information about how far it’s willing to go, and what its policy rates are, at his news conference which begins at 2:20 p.m. ET.

‘SOUND HAWKISH’

The Fed began its current round of policy tightening in mid-March with a quarter-percentage-point rate hike, smaller than many policymakers had wanted given inflation had hit a 40-year high, but calibrated so as not to inject more uncertainty into global markets roiled by Russia’s Feb. 24 invasion of Ukraine.

Since that time, inflation has risen as a result of the war pushing up food and oil prices. China’s tight lockdowns against COVID-19 have further disrupted supply chain.

The U.S. labor markets data also shows an increasing level of tightness. This means that employment costs are rising as companies struggle to keep workers. Inflation could also be caused by record-breaking job opportunities.

This is increasing the pressure on Fed officials to take a more decisive approach to reining things in.

Roberto Perli, Piper Sandler’s economist said that Powell will have strong incentives to remain hawkish. “The Fed’s current focus is 100% on inflation lowering, and hawkish expectation help this cause.

Powell said that in the lead-up to the meeting, he wanted to raise rates “expeditiously”. He said this because he believes they should be moving quickly to what Fed policymakers consider a neutral rate of 2.25-2.5%. If necessary, he will go higher.

His colleagues seem to agree with the least part of this plan.

It would aim to raise borrowing costs sufficiently fast and high enough for households and businesses to reduce spending. This will help lower inflation, which is currently about 3x the Fed’s target of 2%.

However, the central bank is careful not to increase rates so quickly or too high that it causes a short-circuite in the labor market and slows down the economy. Only 3.6% of the U.S. population is now unemployed. This level is close to pre-pandemic levels. A large rate increase could lead to recession.

Analysts say that the Fed has not managed to “soft land” often in the past. This has enabled inflation to grow so fast than interest rates, which may be why it might have missed its chance.

It is likely that it will increase rates quite quickly right now in order to compensate. However, inflation paths are affected by many factors outside of its control such as the progression of the pandemic or the war in Ukraine and continuing supply and labor shortages related to them both.

On Wednesday, the Fed will be discussing its plan to shrink its balance sheet. The Fed released the basic outline of its plan three weeks ago, but investors will soon learn more about the pace and scope of it, as well as possible MBS sales, at some future date.