The Federal Reserve announced Wednesday that the 12-member Federal Open Market Committee's Board of Governors voted unanimously to increase its benchmark federal interest rate by 50 basis points, or a half-percentage point, the largest rate increase in 22 years, and raising the target range for the Federal funds rate to between 0.75% to 1%. The Fed also said it will begin reducing the size of its$9 trillion balance sheet.

The 50 basis-point interest rate increase -- more aggressive than the traditional 25 basis-point increase -- comes as many Americans are struggling with the rising cost of necessities like food and gas. To illustrate, such an increase is equivalent to an extra$50 of interest for every$10,000 in debt. Federal Reserve Chairman Jerome Powell said further increases could come should economic outcomes remain in line with expectations.

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During the news conference, Powell said the committee isn't actively considering an increase of 75 basis points or more at this time, but he did say additional 50 basis-point increases will be on the table for the next few meetings. However, Powell also noted that the committee will remain adaptable as economic and financial conditions change.

The committee will make additional interest-rate hike decisions on a meeting by meeting basis, based on incoming data and the evolving economic outlook.

The Fed hopes to slow down the economy until inflation is back under control by increasing policy interest rates. The Fed has a long-term inflation goal of 2%, and inflation was measured at a staggering 8.5% in March. According to the Fed, personal consumption expenditures (PCE) -- such as housing, food and clothing -- increased 6.6% over the past year.

The interest hike will also impact consumer credit cards, mortgages, and savings account interest rates. So while your credit card annual percentage rate (APR) will increase, so too will the APY on your savings account. It's a good time to pay down those high-interest debts while also working toward emergency savings. These changes could take effect on the next billing cycle.

The goal of the interest rate increase is to combat inflation as it reaches a four-decade high. The Federal Reserve increases the interest rate to help achieve its goal of maximum employment and price stability. Stocks on Wednesday reacted favorably to the Fed's announcement. Between the start of Powell's comments and the close of the market, the Standard & Poor's 500-Stock index, which tracks the largest 500 US companies by market capitalization, gained more than 3% to close the day at 4,300. 

"The economy and the country have been through a lot over the past two years and have proved resilient," Powell said at the press conference. "It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all," he added.

The increase in interest rates comes against the backdrop of unforeseen and unprecedented economic conditions, including disruptions to supply chains due to COVID lockdowns in China and Russia's ongoing invasion of Ukraine. The effects of these economic factors have lasted longer than the Fed has anticipated, Powell said, and could continue to do so for an uncertain amount of time.

"Inflation is much too high. And we understand the hardship that it's causing. We're moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses," Powell said.

In addition to addressing the danger inflation poses, the Fed announced it will begin to decrease the size of its balance sheet significantly. The reduction will occur in phases. Beginning June 1, the Fed will allow security holdings to roll off up to a monthly cap. 

Treasury securities will be capped at$30 billion per month for three months before increasing to$60 billion. Mortgage-backed securities will be capped at$17.5 billion per month for three months and will then increase to$35 billion.

"Our balance sheet decisions are guided by our maximum employment and price stability goals, and in that regard, we'll be prepared to adjust any of the details of our approach in light of economic and financial developments," Powell said.

The Fed said it will continue to make decisions based on incoming data and evolving economic conditions and will continue to communicate its decisions with the American public.

"The American economy is very strong and well-positioned to handle tighter monetary policy. To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission; we at the Fed will do everything we can to achieve our maximum employment and price stability goals," Powell said.

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