At the same time, Chair Jerome Powell said at a news conference that the Fed recognizes that the pace of inflation has cooled — a signal that it could be nearing the end of its rate increases. The stock and bond markets rallied during his news conference, suggesting that they anticipate a forthcoming pause in the Fed’s credit tightening.

Throughout his remarks Wednesday, Powell sounded a dual message. He frequently acknowledged signs that high inflation is slowing.

“We can now say I think for the first time,” he said, “that the disinflationary process has started.”

Yet he also stressed that it was too soon to declare victory over the worst inflation bout in four decades: “We will need substantially more evidence to be confident that inflation is on a long, sustained downward path.”

The Fed’s rate increase Wednesday, though smaller than its half-point hike in December and the four three-quarter-point hikes before that, will likely further raise the costs of many consumer and business loans and the risk of a recession.

In a statement, Fed officials repeated language they’ve used before, that “ongoing increases in the (interest rate) target range will be appropriate.” That is widely interpreted to mean they will raise their benchmark rate again when they next meet in March and perhaps in May as well.

The Fed chair said that so far, much of the inflation slowdown reflects the prices of goods, notably gas but also furniture, appliances and other finished products that have benefited from an unraveling of supply chain snarls.

But Powell reiterated his concern that prices for services — restaurant meals, health care, airline tickets and the like — are still surging. He has said he pays particular attention to services prices because they are labor-intensive. As a result, robust wage gains can keep services prices elevated and perpetuate high inflation.

The central bank’s benchmark rate is now in a range of 4.5% to 4.75%, its highest level in 15 years. Powell appeared to suggest Wednesday that he foresees two additional quarter-point rate hikes:

“We’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” he said, referring to rates high enough to slow the economy.

Yet Wall Street investors have priced in only one more hike. Collectively, in fact, they expect the Fed to reverse course and actually cut rates by the end of this year. That optimism has helped drive stock prices up and bond yields down, easing credit and pushing in the opposite direction that the Fed would prefer.

Last summer, Powell took the opportunity in a high-profile speech in Jackson Hole, Wyoming, to push back against market expectations of rate cuts anytime soon. His speech hammered home the Fed’s intent to keep raising rates — even if it caused “pain” in the form of slower growth and higher unemployment.

On Wednesday, though, Powell declined an opportunity to defuse the market’s buoyant expectations.

“Our focus,” he said, “is not on short-term moves but on sustained changes” in financial markets.

He noted instead that many financial gauges, like mortgage rates, are much higher than they were when the Fed began raising rates.

The divide between the central bank and financial markets is important because rate hikes need to work through markets to affect the economy. The Fed directly controls its key short-term rate. But it has only indirect control over borrowing rates that people and businesses actually pay — for mortgages, corporate bonds, auto loans and many others.

The consequences can be seen in housing. The average fixed rate on a 30-year mortgage soared after the Fed first began hiking rates. Eventually, it topped 7%, more than twice where it had stood before the hiking began.

Yet since the fall, the average mortgage rate has eased to 6.13%, the lowest level since September. And while home sales fell further in December, a measure of signed contracts to buy homes actually rose. That suggested that lower rates might be drawing some home buyers back to the market.

On Wednesday, Powell brushed aside any concern that the Fed will end up tightening credit too much and trigger a recession.

“I still think there is a path to getting inflation down to 2%,” the Fed’s target level, “without a significant economic decline or significant increase in unemployment,” he said.

The U.S. inflation slowdown suggests that the Fed’s rate hikes have started to achieve their goal. But inflation is still far above the central bank’s 2% target. The risk is that with some sectors of the economy weakening, ever-higher borrowing costs could tip the economy into a downturn later this year.

Retail sales, for example, have fallen for two straight months, suggesting that consumers are becoming more cautious about spending. Manufacturing output has fallen for two months. On the other hand, the nation’s job market – the most important pillar of the economy – remains strong, with the unemployment rate at a 53-year low at 3.5%.

The Fed’s hike was announced a day after the government said pay and benefits for America’s workers grew more slowly in the final three months of 2022, the third straight slowdown. Powell said the report was encouraging but reflected wage growth that was still too fast.

While higher pay is good for workers, businesses typically pass their increased labor costs on to their customers by charging higher prices, thereby perpetuating inflation pressures.

In December, overall inflation eased to 6.5% in December from a year earlier, down from a four-decade peak of 9.1% in June. The decline has been driven in part by cheaper gas, which has tumbled to $3.50 a gallon, on average, nationwide, from $5 in June.

In addition to the Fed, other major central banks are fighting high inflation with their own rate hikes. The European Central Bank is expected to raise its benchmark rate by a half-point when it meets Thursday. Inflation in Europe, though slowing, remains high, at 8.5% in January compared with a year earlier.

The Bank of England is forecast to lift its rate at a meeting Thursday as well. Inflation has reached 10.5% in the United Kingdom. The International Monetary Fund has forecast that the U.K. economy will likely enter recession this year.