The Federal Reserve raised its policy interest rate by 75 basis points on Wednesday (early morning of June 16th Beijing time), to a range of 1.5% to 1.75%, intensifying its efforts to combat inflation. In response to the interest rate decision, major assets experienced sharp fluctuations on Wednesday.

Following the announcement, the US dollar surged, gold prices fell from their highs, and the decline in US Treasury yields narrowed. At the press conference, Powell stated that significant rate hikes would not become the norm, which helped to soothe market sentiment. US stocks and bonds rebounded significantly, while the US dollar plummeted and gold prices soared.

The Federal Reserve took a drastic step: a massive rate hike of 75 basis points! This is the largest increase since 1994, 28 years ago. Not only did the Federal Reserve take a drastic step, but Federal Reserve Chairman Powell also spoke sternly: he is determined to curb inflation and will continue to raise rates by 50 or 75 basis points at the next monetary meeting. It appears that between the dilemma of economic recession and inflation, the Federal Reserve and its Chairman Powell have firmly sided with curbing inflation.

Powell is well aware of the impact of such a tight monetary policy on the economy, and he has revised down the economic growth forecasts for 2022-2024. As I have said before, former US President Ford once said a famous quote: "Inflation is the number one enemy of the people!" Every Federal Reserve Chairman has been relentless against this number one enemy, and Powell is no exception.

The Federal Reserve statement expressed high concern about inflation risks, with a "firm commitment" to restore the inflation rate to 2%, and reiterated that it believes continued rate hikes are appropriate. I am sweating for the Federal Reserve. The inflation rate in May was 8.6%, and to restore it to the target of 2%, it needs to be reduced by 6.6 percentage points, the difficulty of which can be imagined.

The Federal Reserve's FOMC economic projections show that the median expected values for the federal funds rate at the end of 2022, 2023, and 2024 are 3.4%, 3.8%, and 3.4%, respectively. The Federal Reserve reiterated that it believes continued rate hikes are appropriate. With such a magnitude of rate hikes and such tight monetary policy, whether the market can bear it, whether the economy can bear it, and whether technology stocks will be completely scared down? The probability is not small.

The Federal Reserve has also considered the concerns about a US economic recession, claiming that it will continue to monitor the impact of incoming information on the economic outlook when assessing the appropriate policy stance. If risks emerge that could hinder the committee from achieving its goals, the committee is prepared to adjust its monetary policy stance as appropriate. It has painted a pie for the market and issued an empty check for the economy.

As inflation becomes more deeply rooted in the economy, eroding consumers' purchasing power, and the Federal Reserve takes more aggressive measures to address inflation, the US economy will experience a "moderate recession" starting from mid-2023.

The most worrying thing is that the Federal Reserve's tight monetary policy may not only fail to curb inflation but also lead to an economic recession. I always believe that the Federal Reserve has not accurately identified the root cause of high inflation in the United States. How should emerging markets respond as the Federal Reserve continues with its aggressive rate hikes?The Federal Reserve's interest rate hike has led to an increase in the US Dollar Index, causing the dollar to appreciate more rapidly. International capital is flowing back to the United States from emerging markets, effectively forcing these countries to tighten their monetary policies passively. This year alone, the US Dollar Index has risen by more than 9%, reaching a new high not seen in nearly two decades.

Behind the resurgence of the strong dollar, it has actually accelerated the flow of global capital towards the US stock market. Some funds are compelled to withdraw from certain emerging markets. On one hand, they repatriate assets back to the United States to preserve and increase their value. On the other hand, they replenish the margin requirements of the US stock market to reduce the risks of liquidation or even a margin call. At this juncture, the exodus of capital from emerging market countries poses a significant risk of bursting bubbles. This is a risk that cannot be ignored!