What Federal Reserve Chair Jerome Powell said in staid tones on Wednesday may not have sounded momentous. It was.

The US central bank now expects to raise interest rates in 2023 as the post-pandemic economy booms and inflation rises. That’s sooner than it indicated in March, when the Fed predicted rates would stay near zero for at least the next two years.

And officials are starting to discuss when to roll back the Fed’s huge asset purchase program, which has been gobbling up $120 billion in securities a month to keep borrowing costs low.

“You can think of this meeting that we had as the ‘talking about talking about’ meeting, if you’d like,” Powell said, indicating that a policy change is at least on the central bank’s radar.

The shift was immediately felt across markets, which have been drunk on crisis-era stimulus measures for more than a year.

The inflation threat: Prices are surging, fears are growing, consequences are real

Following the announcement, the Dow fell more than 380 points, or 1.1%, and the S&P 500 and Nasdaq Composite both dropped as much as 1% and 1.2%, respectively. The bond market also experienced a sell-off, with the yield on five-year US Treasuries, which move opposite prices, jumping around 0.1%. Real yields, which refer to what borrowers pay when inflation is factored in, notched an even larger increase.

The US dollar was last trading at its strongest level in more than two months against a basket of other major currencies. In Europe, the STOXX 600 index fell for the first time in 10 trading sessions on Thursday, while government bond yields rose.

Oliver Blackbourn, a multi-asset portfolio manager at Janus Henderson, told me that he thinks the Fed’s “hawkish surprise” could feed through markets for some time, especially if real yields stay elevated and the dollar holds its ground. That could hit emerging markets and commodities like oil.

“We’ve been through quite a long period now where we’ve had very helpful fiscal policy at the same time as easy monetary policy,” Blackbourn said. “One of those supports for markets is now changing, and being taken away slowly.”

He believes the Fed’s pivot could “take some of the edge off the [stock] market rally,” even though strong corporate earnings will continue to act as a support.

The key statistic

The conversation, at its core, is all about inflation. The Fed increased its 2021 inflation forecast to 3.4%, a whole percentage point higher than its previous estimate.

Powell made clear on Wednesday that the Fed still believes price pressures will be transitory — and if it’s wrong, it has the tools it would need to address the problem.

“The Fed welcomes some inflation at the moment,” Blackbourn said. “We’ve been through a long period where [it’s] struggled with disinflationary forces.”

But there’s a lot of uncertainty as the Fed eyes the beginning of the end, forcing investors to stay on high alert. If rising inflation does stick around, the central bank could be forced to hike rates sharply.

“We don’t in any way dismiss the chance that it can work out that [inflation] goes on longer than expected,” Powell said.