The Federal Reserve's most significant rate hike in decades and its plans for more hikes into next year will do little to tame the historic runup in inflation, market strategists said.

In fact, its decision to raise its benchmark interest rate by 50 basis points for the first time since 2000 drew criticism that the central bank will remain out of step with economic realities for the foreseeable future.

"It appears that [the Fed is] trying to do as little real damage to the economy as possible while relying on time to resolve the ongoing supply chain disruptions and other factors driving inflation that are out of the Fed's control," said Matthew Weller, global head of research with FOREX.com and City Index. "Like pressing the 'close door' button on an elevator, raising rates incrementally allows the Fed to feel like it's doing something while the underlying mechanism proceeds at its own pace."

On May 4, Powell announced that the Federal Open Market Committee had voted unanimously to raise the federal funds rate by 50 basis points, double the more traditional hike of 25 basis points and its first hike of that size in 22 years.

Powell also said that a 75-basis-point hike is "not something the committee is actively considering," while stating that 50-basis-point hikes "should be on the table for the next couple of meetings."

But without more aggressive hikes, the Fed's efforts to combat inflation could prove ineffective.

"It's never easy to figure out what the market wants, but it feels to me like everyone would feel more comfortable if they really front end loaded some hikes and then paused to see if inflation comes down," said Patrick Leary, a senior trader with Loop Capital Markets. "This idea that they can take it slow right now seems like they are trying not to upset the market, but that strategy isn't working very well."

Neutral rate

The Fed is trying to reach a so-called neutral rate, which neither stimulates nor constrains the economy, which Fed officials believe lies somewhere between 2% and 3%. But Powell said this may not be the endpoint for policy.

"We're going to be making a judgment about whether we've done enough to get us on a path to restore price stability," Powell said May 4, stressing that Fed officials were willing to go above neutral rates if needed.

Powell's comments indicate that nobody really knows where the neutral rate is at the moment nor how long it will take to get there, said Callie Cox, a U.S. investment analyst at eToro.

"But the fact that the Fed isn't stubbornly targeting a specific rate or time frame should give you comfort in how they're managing the tightening process," Cox said. "This Fed regime is known for being data-dependent and gradual, so it's constantly adjusting to incoming information."

The central bank is also constrained in just how aggressively it can pursue that path, said Kathy Jones, managing director and chief fixed-income strategist with the Schwab Center for Financial Research.

"Even though fighting inflation will require higher rates, the Fed doesn't want to jolt markets with big moves," Jones said, pointing out that consumer and business loan rates would be severely upended by aggressive hikes. "Moving too fast could lead to a sharp reduction in demand."

Fighting inflation

The personal consumption expenditures price index, the Fed's preferred inflation metric, rose 6.6% from March 2021 to March 2022, its biggest increase since 1982.

Powell stressed that the Fed remains in a tough spot on inflation since much of the increase is due to supply-side factors, such as supply chain bottlenecks, labor shortages and COVID-19 lockdowns.

"Our tools don't really work on supply shocks," Powell said. "Our tools work on demand."

But there are signs that inflation is improving, such as the 11.5% increase in U.S. imports in the first quarter of the year, according to the latest Commerce Department data.

"Inflation is not going to get near their target anytime soon, but it is starting to head in the right direction," said Gene Goldman, chief investment officer at Cetera Investment Management.