The rate hike is finally here! The Fed's tightening cycle may restart, and global markets could face a chain reaction of shocks.

The Federal Reserve is tightening monetary policy, and its effects are likely to extend far beyond U.S. borders. On Wednesday, the Fed announced it would raise the target range for the federal funds rate by 25 basis points to 3.75%4%. This is the Fed's first rate hike since July 2023. More notably, the latest dot plot, which tracks Fed officials' expectations for future policy moves, shows that 16 of the 18 officials who submitted rate projections expect at least one more hike this year. Fed Chair Warsh said the U.S. economy is showing signs of strengthening, but the underlying trend in inflation has not yet improved markedly, and the current policy focus is to bring inflation down. Warsh described the hike as "removing some degree of policy accommodation." He said overall financial conditions are still hard to call restrictive, and Federal Open Market Committee (FOMC) members broadly agree with that assessment. Historically, once the Fed starts raising rates, it usually does not adjust just once. Before this meeting's decision was announced, the market was focused on when the hike would come and by how much. Now that the hike has landed, the market is worried about whether this marks the start of a new rate-hike cycle and when the next move will come. Traders currently expect three more Fed hikes by the middle of next year, one more than before the decision was released. Interest-rate swaps suggest the next hike could come as early as next month. This week's 25-basis-point hike may not be an isolated policy adjustment. Upcoming inflation, employment and energy price data will be key in determining whether the Fed continues to tighten later this year. Some experts say that for global markets, a new U.S. tightening cycle could mean a stronger dollar, more pressure on other currencies, and less room for other central banks to ease policy. Higher U.S. rates could also keep global bond yields elevated and weigh on equity valuations and economic growth. The dollar faces upward pressure, while other currencies come under strain. One of the most direct channels through which Fed tightening transmits globally is the dollar. Higher U.S. rates support the dollar while putting pressure on other currencies. Mark Zandi, chief economist at Moody's Analytics, said the Fed's hike and its signal of more to come are putting some upward pressure on the dollar and downward pressure on other currencies, especially for economies whose currencies or monetary policy are closely tied to U.S. rates. Navin Saigal, head of global fixed income for Asia-Pacific at BlackRock, also said the market's hawkish read of the Fed meeting "could put some pressure on Asian currencies and bond markets in the short term." Japan is one of the focal points for markets. Mark Zandi further explained that a weaker yen could further strengthen the case for the Bank of Japan to keep tightening, "and that does put pressure on Japan to continue to follow and raise rates." Currency depreciation can also make it more complicated for central banks to fight inflation, because a weaker currency raises the local-currency cost of imported goods. This comes as oil prices have already risen sharply because of the Middle East conflict, leaving some economies facing the risk of higher energy costs, weaker currencies and high interest rates all at once. Other central banks' monetary policy may also be affected. As the Fed shifts policy, some major developed-market central banks are also tightening. The European Central Bank raised rates by 25 basis points last week, and JPMorgan Asset Management expects the Bank of Japan to raise rates by 25 basis points this week. Tai Hui, chief market strategist for Asia-Pacific at JPMorgan Asset Management, said: "Developed-market central banks are tightening monetary policy in sync to address inflation concerns." Rising U.S. Treasury yields due to higher rates also increase the likelihood of capital flowing from other markets into the United States, putting pressure on other central banks to respond. However, the Fed's action does not necessarily mean the world will enter a synchronized rate-hike cycle. Inflation conditions across Asian economies are unusually divergent. China and Thailand still face deflationary pressure, while inflation in Australia and Japan remains above central bank targets. BlackRock said that, at the same time, India's inflation rate is roughly near the midpoint of the Reserve Bank of India's target range. This means that even if a stronger dollar reduces policymakers' room to ease, domestic economic conditions may ultimately outweigh pressure to mechanically follow the Fed. High rates may weigh on stocks and economic growth. For financial markets, keeping rates high for a long time also means a higher hurdle for stocks and other risk assets. Rising government bond yields make fixed-income assets more competitive relative to equities, while pushing up corporate funding costs and lowering investors' present-value valuations of future earnings. Liz Ann Sonders, chief investment strategist at Charles Schwab, said the level of yields may matter less than the speed at which they rise and whether the process is orderly. She said the 10-year U.S. Treasury yield's move toward 5% is broadly reasonable given factors including inflation, Fed policy expectations and strong nominal economic growth. Liz Ann Sonders said: "I think if the move in yields starts to become disorderly, then the stock market will face more pressure to digest it. But I think as long as the process remains orderly, the economy and the market can withstand this kind of change to some extent." That pressure is also unlikely to be evenly distributed. Liz Ann Sonders said higher rates have already begun to hit cyclically sensitive parts of the market, while strong earnings may complicate the inflation outlook by supporting jobs and hiring. JPMorgan's Tai Hui said that if the Fed's hawkish stance persists into 2027, investors may need to reassess valuations, especially for rate-sensitive technology stocks. For global markets, higher U.S. rates are only one aspect. A resilient U.S. economy gives the Fed room to tighten policy, while also potentially supporting export demand and business activity elsewhere. BlackRock's Navin Saigal said that even if higher rates create short-term pressure, strong U.S. economic growth should continue to drive global economic activity, trade flows and corporate fundamentals in Asia.