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The US central bank has fired the starting pistol on interest rate rises as the world's largest economy faces up to a surge in inflation that is only predicted to accelerate during Russia's war in Ukraine.

The Federal Reserve raised its benchmark rate, for the first time since 2018, by a quarter point to a target range of 0.25% to 0.5% and signalled further increases towards a 2% level by the year's end.

It marked the bank's first major move against prices that have been leaping upwards since April last year.

Policymakers opted to allow the economy to run hot as employment recovered from the effects of the COVID-19 pandemic.

However, inflation is currently at its highest level for almost 40 years and expected, by the Fed, to accelerate as the impact of President Putin's war and resulting Western sanctions disrupt key commodity flows such as oil, gas, metals and foodstuffs including wheat.

The future inflation path is further complicated by the pandemic, which has forced large parts of China's economy into lockdown sparking further supply chain delays globally.

The dilemma facing the Fed is that a series of rate rises, designed to cool inflation expectations around things such as wage increases, could choke off demand in an economy facing severe uncertainty because borrowing costs go up.

But the bank said the war in Ukraine was creating "additional upward pressure on inflation" and weighing on
economic activity.

It indicated that "ongoing increases" in the target federal funds rate - its core rate - would be "appropriate".

The monetary policy language was evident too as inflation was projected to remain "elevated", ending 2022 at 4.3% - partly a consequence of rising rates but earlier price rises exiting the calculation.

The Fed also adjusted its expectations for US economic growth this year.

It had forecast 4% in December but now pencilled in a rate of 2.8%.

It said: "The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity."

Fed chair Jay Powell hopes that by making borrowing gradually more expensive, the bank will succeed in cooling demand for homes, cars and other goods and services, thereby slowing inflation.

He said at a news conference: "All signs are that this is a strong economy, one that will be able to flourish in the face of less accommodative monetary policy."

However, he acknowledged that lower income families were facing the tightest pinch and explained that the Fed's actions would keep a lid on prices as best they could.

"We do understand very much, and we very much take to heart, that it's our obligation to restore price stability", he said.

"We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation. We know that the best thing we can do to support a strong labour market is to promote... expansion and that is only possible in an environment of price stability."

The market response was jittery.

The dollar shifted wildly and eventually lost ground sharply - despite the accelerated rate hike projection - and was almost a cent weaker against sterling at $1.31.

Bond yields rose strongly while stocks fell initially.

However, the S&P 500 ended the day more than 2% up.

The debate raging among market participants centred on the belief, for some, that up to seven rate hikes this year would prove impossible as the economy slows - forcing the Fed to slow its tightening.

Joseph Lavorgna, Americas economist at Natixis, said: "They're going to try to be aggressive here in raising rates.

"I wish Jay Powell and company all the best of luck because they're not going to get anywhere near as they think, unless they're willing to throw a lot of people out of jobs, because that's what's going to happen.

"We're going to have a recession. This is a recession forecast. This is magical forecasting. I don't think it holds up to historical scrutiny."