When is the first rate hike

Federal Reserve Chair Jerome Powell collects his notebooks as he testifies before the Senate Banking Committee on March 3. The Fed is widely expected to raise interest rates by half a percentage point at its meeting this week.

The Federal Reserve is about to deliver its biggest punch yet in the fight against surging inflation.

Policymakers start a two-day meeting on Tuesday, and they are widely expected to raise interest rates by half a percentage point — the largest rate hike in more than two decades.

It's a clear sign of the urgency with which the Fed is approaching inflation, as prices continue to climb at the fastest pace in 40 years.

And the Fed won't be done there. The central bank is likely to keep pushing borrowing costs higher in the months to come.

Here's a quick look at the Fed's battle plan.

Why is the Fed raising interest rates?

The central bank is worried that prices are climbing too rapidly as people continue to spend money, from shopping for stuff to booking long-delayed vacations.

Demand is so strong it's outpacing what businesses can deliver, given that global supply chains are still fragile and employers are still struggling to find enough workers.

A key measure from the Commerce Department last week showed prices had surged 6.6% during the 12 months ending in March. That's more than three times the Fed's target rate for inflation and the sharpest increase in prices since 1982.

The Fed hopes to tamp down demand and ease inflation by making it more expensive to borrow money.

The Fed raised interest rates by a quarter of a percentage point in March, and it's expected to follow up this week with its first half-point rate hike since 2000.

Prices for groceries have surged as inflation has hit its highest level in four decades. Here, prices are displayed at a supermarket in Rosemead, Calif., on April 21.

Potentially a lot more.

Experts say interest rates may have to climb significantly to reduce demand after the Fed kept borrowing costs at rock-bottom levels through much of the coronavirus pandemic.

On average, Fed policymakers said at their March meeting, rates would need to rise nearly 2 full percentage points this year, with additional rate increases next year.

Fed Chair Jerome Powell said the central bank will keep a close eye on how the economy performs and adjust the pace of rate hikes as needed.

But Powell thinks the Fed's usual practice of raising rates a quarter-point at a time may not be enough. He suggests the central bank needs to move aggressively upfront and then reassess as needed.

"It is appropriate in my view to be moving a little more quickly," Powell told an International Monetary Fund forum last month. "I also think there's something in the idea of front-end loading whatever accommodation one thinks is appropriate."

How will raising borrowing costs affect the economy?

Rising interest rates make it more expensive to take out a car loan or carry a balance on a credit card.

They also raise the cost of buying a home. Mortgage rates have already soared above 5% in anticipation of the Fed's actions, up from less than 3% a year ago. That adds about $370 to the monthly payment on a median-priced house.

Airline passengers prepare to enter a security checkpoint at San Francisco International Airport on April 19.

The Fed's intent in raising rates is to discourage spending just enough to bring down inflation, without tipping the economy into recession — what economists call a "soft landing."

"That's our goal," Powell said. "I don't think you'll hear anyone at the Fed say that that's going to be straightforward or easy."

Some analysts are skeptical that the central bank can strike that delicate balance, having waited until inflation has climbed so high.

They warn the kind of aggressive action that's now needed to control prices is likely to trigger an economic downturn. Deutsche Bank, a German lender and major Wall Street firm, last week forecast a "major recession" next year.

Those concerns contributed to last week's sharp sell-off in the stock market.

What other steps is the Fed taking?

In addition to raising interest rates, the Fed is expected to announce plans to gradually reduce the collection of government bonds and mortgage-backed securities that it bought during the pandemic.

Buying those bonds helped pump money into the economy and keep borrowing costs low. Reducing the Fed's holdings should have the opposite effect — tamping down demand and helping to curb inflation.

"It's a secondary tool, but it does remove quite a bit of liquidity and accommodation from the system," said Kathy Bostjancic of Oxford Economics.

LONDON, July 5 (Reuters) - More G10 central banks raised interest rates in June than in any month for at least two decades, Reuters calculations showed, and with inflation at multi-decade highs, the pace of policy-tightening is unlikely to let up in the second half of 2022.

Central banks overseeing seven of the 10 most heavily traded currencies delivered 350 basis points of rate hikes between them last month - nearly half the total 775 bps administered by policymakers across the group this year to date.

While the U.S. Federal Reserve lifted rates 75 bps to a range of 1.5%-1.75%, its biggest single move since 1994, Switzerland stunned markets with a 50 bps hike in borrowing costs, matching moves by Australia, Sweden, Norway and Canada. read more

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These countries are still far behind the emerging market central banks which mostly initiated rate hike cycles last year. But they are moving fast.

Already in July, the Reserve Bank of Australia has delivered a 50 bps rate increase. On July 21, the European Central Bank will deliver its first rate hike since 2011 and the Fed is widely expected to go with another 75 bps at its July 26-27 meeting.

"The Fed seems on autopilot to get to 3.5% and the ECB similarly is on autopilot to get rates to positive levels," said Alex Brazier deputy head of the BlackRock Investment Institute.

But U.S. rates at 3.5% "will have the effect of seriously slowing the economy, so after that it will have to change course", Brazier added.

The task of squaring that circle between avoiding a hard-landing on growth and reining in inflation - now in double-digits in many countries - is hardest for developing nations.

Emerging economies for the most part were quick off the mark in their battle against inflation, raising rates well before developed peers began to do so.

Many continue to lift borrowing costs but the situation poses risks. With inflation failing to peak as expected in the first six months of the year, "hiking fatigue" may set in, warned Luis Oganes, JPMorgan's head of Global Macro Research.

"Those central banks will face the question of what is the least they can hike in the second half to anchor inflation expectations without pushing their economies into recession," Oganes said.

In May, as it became clear that the Russia-Ukraine conflict - and the ensuing inflationary shocks - would last longer than anticipated, 12 central banks from a group of 18 big developing economies raised rates. Eight more followed in June.

In total, emerging market central banks have raised interest rates by 4,415 bps year-to-date, compared to 2,745 bps for the whole of 2021, calculations show.

"Ironically, even though emerging markets tightened much earlier and more forcefully, inflation may not fall as quickly as in developed markets if food inflation continues to rise," said Manik Narain, head of emerging markets strategy at UBS.

"In this respect the biggest growth/inflation tradeoff is likely being faced in emerging markets, not the U.S.."

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Reporting by Karin Strohecker and Sujata Rao; Graphics by Vincent Flasseur; Editing by Sujata Rao and Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.