Federal Reserve officials are coalescing around a plan to raise interest rates steadily starting in March and then move swiftly to shrink the central bank’s big bond holdings as policymakers look to cool the economy at a moment of rapid inflation.

Policymakers have spent the past week broadcasting that the interest rate increase they plan to make at their March meeting — one that investors already fully expect central bankers to make as they try to tame price increases — will be the first in a string of rate moves. Central bankers also appear to be converging on a plan to promptly start shrinking the Fed’s holdings of government-backed debt, which were vastly expanded during the pandemic downturn as the Fed snapped up bonds in a bid to keep markets functioning and cushion the economy.

The central bank purchased $120 billion in Treasury securities and mortgage-backed securities in 2020 and 2021. Officials have been slowing down those purchases and are expected to stop them completely in March. By quickly pivoting to allow securities on its now nearly $9 trillion balance sheet to expire without reinvestment — reducing its holdings over time — the central bank would take away an important source of demand for government-backed debt and push rates on those securities higher. This would go hand in hand with a higher Fed interest rate to make all types of borrowing more expensive.

Higher borrowing costs will impact lending and spending. This will temper demand and slow down price gains that have been uncomfortably fast. Fresh data out this week is expected to show further acceleration in the central bank’s preferred inflation gauge, which is already running at its fastest pace in 40 years.

Lael Brainard, a Fed governor who has been nominated by President Biden to serve as vice chair, said last week that she believed a “series” of rate increases were warranted.

Understanding inflation in the U.S.

  • Inflation 101 What is inflation, why is it up and whom does it hurt? Our guide explains everything.
  • Answers to your questions: We asked readers to send questions about inflation. Top economists and experts participated.
  • What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns, shortages and inflation cause inflation? Washington is a hotbed of debate.
  • Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.

“I do anticipate that it will be appropriate, at our next meeting, which is in just a few weeks, to initiate a series of rate increases,” she said on Friday at a forum held by the University of Chicago’s Booth School of Business in New York. Ms. Brainard said that the Fed would then turn to shrinking its balance sheet, a process that could be appropriate to start “in coming meetings.”

Michelle Bowman, another Fed governor, echoed that balance sheet reduction could start imminently, saying in a speech on Monday that the Fed needs to begin to reduce the size of its bond holdings “in the coming months.”

There is much debate about the timing of balance sheet shrinking. John C. Williams, president of the Federal Reserve Bank of New York, suggested on Friday that the process could start “later this year,” which could suggest in coming months or slightly later. Officials have been consistent in stating that investors can expect a pullback, and probably sooner than they had anticipated.

Although Fed policymakers plan to shrink their holdings of Treasury bonds and mortgage-backed securities by allowing securities to expire without reinvesting them, rather than by actively selling the debt, the central bank’s latest meeting minutes suggested that officials could eventually move to outright sales of mortgage-tied securities. The minutes also suggested that officials thought “a significant reduction” in the size of the balance sheet would be warranted.

The central bank’s planned moves would be a rapid pace of change compared to the last time they increased interest rates, from 2015 to the end of 2018. Officials reduced the balance sheet slowly and increased interest rates glacially, one per quarter at most.

Borrowing costs have already begun to rise as investors adjust to the Fed’s more rapid-fire plans. Markets expect six to seven quarter-point rate increases this year. The rate on a 30-year mortgage has climbed from about 2.9 percent last fall — when the Fed began its policy pivot — to 3.9 percent now.

F.A.Q. in Inflation

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What is inflation? Inflation is a loss in purchasing power that occurs over time. It means that your dollar will not get as far tomorrow than it did today. It is often expressed as the annual increase in prices for everyday goods, such as food, clothing, transportation, and toys.

What causes inflation? It could also be due to rising consumer demands. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Where is inflation heading? Officials maintain that they don’t see evidence that rapid inflation has become a permanent feature of the economy, despite prices rising rapidly. There are plenty of reasons to believe that the inflationary burst will fade, but some concerning signs suggest it may last.

Is inflation bad for you? It all depends on the situation. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.

How does inflation affect the poor Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.

Can inflation affect stock market? Rapid inflation typically spells trouble for stocks. Historically, financial assets have performed poorly during inflation booms. However, tangible assets such as houses have held their value well.

The Fed’s policy changes “will bring inflation down over time, while sustaining a recovery that includes everyone,” Ms. Brainard said, adding that as the Fed signals that it will raise rates, “the market is clearly aligned with that.”

Fed officials worry about the need to move faster with rising inflation, strong wage growth, and signs of a tight labor market.

Ms. Bowman, for instance, said she was still open to half-percentage point increase in March — something her colleague James Bullard, president of the Federal Reserve Bank of St. Louis, has also suggested.

“I will be watching the data closely to judge the appropriate size of an increase at the March meeting,” Ms. Bowman said.

Bullard, who repeatedly stated that he would prefer rates rise by a full percent by July, also indicated that he would be deferring to the chair Jerome H. Powell regarding the size and timing of the initial increase. And other members of the Fed’s policy-setting committee have suggested that they do not think starting with a half-point increase is necessary, suggesting that a smaller increase may be more likely.

“There’s really no kind of compelling argument that you have to be faster right in the beginning,” Mr. Williams, president of the powerful Federal Reserve Bank of New York, told reporters last week.

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