The Federal Reserve made its strongest move yet toward tackling inflation on Wednesday, moving up the timeline for what could be as many as three interest rate hikes next year.

The Fed’s policy pivot toward inflation, and away from boosting the job market, marks a significant shift in how the Fed is responding to rising costs during the coronavirus pandemic. Higher interest rates tend to increase the cost of loans and business investments, even if they are also intended to bring down prices of everyday goods and services.

“There’s a real risk now, we believe — I believe — that inflation may be more persistent,” Fed Chair Jerome H. Powell said at a news conference Wednesday. “The risk of higher inflation becoming entrenched has certainly increased. I don’t think it’s high at this moment, but I think it’s increased.”

Inflation is causing rising prices at the gas station and grocery store. Experts explain what is causing inflation and how long it might stick around. (Sarah Hashemi, Hadley Green/The Washington Post)

The Fed also announced on Wednesday that it will speed up the timeline by a few months to remove supports for the financial system that have been in place since early in the pandemic. The Fed would then be in a better position to raise rates from near zero for the first time since the pandemic began.

The Fed has been holding off on cooling down the economy, in hopes that vast economic supports would continue to help the labor market grow. The Fed this week reiterated that, for now, it will keep rates near zero until the labor market hits policymakers’ threshold of “maximum employment.” Powell said that all of his colleagues expect the labor market will reach maximum employment next year.

But as inflation becomes more persistent throughout the economy, pressure is building on the Fed to take action. Sen. Patrick J. Toomey (R-Pa.) called the announcement “long overdue” and a “modest step in the right direction.”

“With inflation now reaching a nearly 40-year high, the Fed needs to continue taking this threat seriously and move to normalize interest rates,” Toomey tweeted Wednesday.

Inflation concerns are also affecting the White House’s push for a big spending bill, with Sen. Joe Manchin III (D-W.Va.) arguing that another major infusion of federal dollars could drive prices even higher.

By many measures, the economy has made tremendous progress since the pandemic shut down the economy and wiped out millions of jobs. The country has been adding more than 500,000 jobs a month on average. Consumer spending has generally been strong, and retail sales rose for the fourth straight month in November, though they came in below analysts’ forecasts.

Some 4.2 million Americans quit their jobs in October, and wages have also risen significantly over the last year, especially for lower-income workers, but gains are also being eroded by inflation.

The major stock indexes all finished higher on Wednesday, buoyed by optimism regarding the Fed news, with most on track to finish close to 20 percent higher for the year.

Still, inflation has emerged as a crucial litmus test for how people perceive the recovery in their daily lives, including at the gas pump, in the grocery aisle and on rent checks. Several recent surveys point to growing concerns about inflation among American households.

For much of the past year, Fed leaders said inflation would be temporary, or “transitory,” and more limited to sectors hit hard by supply chain issues and other repercussions from the pandemic. But over time, that message conflicted with the severity of inflation spreading further in the economy.

Fed officials recently ditched their messages around temporary inflation. Higher prices in just about every sector, from pork, poultry and produce to housing and sporting goods, are increasingly stretching the pocketbooks of households and businesses and eroding people’s optimism regarding how the economy is doing overall.

Powell said on Wednesday that he’s also closely watching rent prices, which have risen steadily each month and aren’t expected to fall once supply chain issues or other repercussions from the pandemic clear up. Powell also said he is keeping an eye on wages, which have been rising quickly, especially for lower-wage workers, but can also push inflation higher as workers push for higher pay and businesses pass steeper costs on to consumers.

“We’ve been calling out the fact [prices] are becoming larger and more persistent,” Powell said. “… And we will be in a position to raise interest rates when that’s appropriate, and we will.”

The Fed has two mandates — keeping prices stable and getting the economy to full employment. But combating inflation by raising interest rates can slow job market growth.

Powell defended the Fed, saying it was not behind the curve in addressing inflation. Still, recent data convinced him and others that it was time for a shift in policy. Since the Fed’s most recent meeting in November, a measure of inflation known as the consumer price index showed that prices rose 6.2 percent in October compared with the year before, marking the largest rise in three decades. Then last week, the index showed prices rose 6.8 percent in November, the largest rise in nearly 40 years.

There’s also been notable progress in the job market. The unemployment rate fell to 4.2 percent in November, down from 4.6 percent in October. Since the Fed’s November meeting, two jobs reports showed the economy adding roughly 740,000 jobs.

However, some 4 million jobs are still missing from the labor market compared to pre-covid days. Economists say they are hopeful that the coming months will continue to bring strong job gains, so long as the omicron variant or other unforeseen challenge don’t slow momentum.

Powell has long said that the pandemic needs to end for the economy to fully recover. Still, Tim Duy, an economist and Fed expert at the University of Oregon, said the Fed’s policy shift sent a signal that wasn’t just about triaging the coronavirus crisis or patching holes in the recovery.

“It tells us the Fed is moving beyond the pandemic, as far as monetary policy is concerned, and is looking toward a different path for rates,” Duy said. “It’s clear that inflation has accelerated. They’ve declared that their ‘inflation trigger’ has been met. They’re waiting to meet the ‘full employment’ trigger.”

Indeed, Fed watchers are waiting to see how the Fed will decide if the “full employment” threshold has been met, before addressing high inflation. For example, Powell pointed to labor force participation, which has been slow to recover, in part because of constraints on the job market such as fear of getting sick or limited access to child care and elder care.

“We don’t have a strong labor force participation recovery yet, and we may not have it for some time,” Powell said. “At the same time, we have to make policy now, and inflation is well above target. This is something we need to take into account.”

In a separate move signaling concern about inflation, the Fed also revealed new details on speeding up the full winding down of its vast asset purchase program to March, as opposed to the initial goal of mid-2022. Fed officials want the “taper” of supports for the financial system to end sooner, so that it can be better prepared to raise interest rates.

Policymakers noted in projections that they expect inflation to drop off notably in 2022 but remain elevated at 2.6 percent. Policymakers don’t see inflation falling closer to the Fed’s 2 percent target until the end of 2023 or 2024.

At the same time, officials are also forecasting continued growth in the labor market, even as the jobless rate now stands at 4.2 percent. Policymakers expect the unemployment rate to fall to a pre-pandemic level of 3.5 percent in 2022.

The Fed’s main lever for fighting inflation is through interest rates. Central bankers can raise or lower rates, depending on what they are seeing in the economy. Lower rates boost growth and help make the cost of business investment and loans cheaper. Higher rates limit that growth and, in turn, have a cooling effect over the job market. Rates that are raised too sharply have the ability to spur a recession.

But that tool has its limits and operates with a lag. Rates affect the economy overall and cannot specifically bring down the sticker price for used cars or solve a broken supply chain.

Economists and policymakers often cite backlogged supply chains for driving prices up. But they also point to high consumer demand that is far outpacing levels seen before the pandemic. Such high demand was boosted, in part, by major stimulus measures passed by Congress, along with the Fed’s own monetary supports.

Powell defended the Fed’s moves, saying that monetary and fiscal aid during such extreme circumstances helped stabilize the recovery and bring about “really strong growth, really strong demand, high incomes,” even as the economy is experiencing high inflation now.

“People will judge in 25 years whether we overdid it or not. But the reality is we are where we are,” Powell said. “We think our policy is the right one for the situation that we’re in.”