The U.S. Federal Reserve on Wednesday kicked off an interest-rate hiking cycle and signaled six more rate hikes later this year, as it seeks to tame the highest U.S. inflation in four decades.

However, investors and economists are concerned that a more aggressive Fed hike cycle could tip the U.S. economy into a recession and have adverse spillover effects on emerging markets and developing economies. It would also push up global borrowing costs significantly, adding to mounting worries about growing debt burdens in the wake of the COVID-19 pandemic.

Hikes against inflation

The Fed on Wednesday raised its benchmark interest rate, the federal funds rate, by a quarter percentage point to a range of 0.25 percent to 0.5 percent from near zero. This marked the Fed's first rate hike since 2018 and a major step in exiting from the ultra-loose monetary policy enacted at the start of the pandemic.

"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures," the Fed said in a statement after a two-day policy meeting, adding the Ukraine crisis and related events are likely to "create additional upward pressure" on inflation.

The U.S. consumer price index surged 7.9 percent in February from a year earlier, the fastest annual pace since January 1982, according to the U.S. Labor Department.

"We're not going to let high inflation become entrenched. The costs of that would be too high," Fed Chair Jerome Powell said on Wednesday afternoon at a virtual press conference, adding every Fed meeting is "a live meeting" regarding raising interest rates.

"If we do conclude that it would be appropriate to move more quickly to remove accommodation, then we'll do so," he said, expecting U.S. inflation to "remain high through the middle of the year" before coming down more sharply next year.

The Fed's quarterly economic projections released Wednesday showed that most Fed officials expect the federal funds rate to rise to 1.9 percent by the end of this year and to around 2.8 percent by the end of 2023.

That implies a total of seven quarter-percentage-point rate hikes this year and another three or four next year. It is a more aggressive pace of hiking than Fed officials projected last December, when their median projection was just three rate increases this year.

"This is a significantly more hawkish Fed, focused on forcefully reining in inflation," said Diane Swonk, chief economist at major accounting firm Grant Thornton.

Desmond Lachman, senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund (IMF), told Xinhua that the market's expectations of five to seven rate hikes this year seem "very reasonable" to him, as the Fed remains far behind the curve in fighting inflation and U.S. interest rates remain at very negative levels in inflation-adjusted terms.

Soft landing or recession

The Fed faces the difficult task of securing a soft landing for the world's largest economy. Raising interest rates too slowly risks allowing inflation to run out of control, while tightening too quickly could tip the U.S. economy into a recession.

Noting that the U.S. economy is "well-positioned" to withstand tighter monetary policy, Powell said the probability of a recession within the next year is not particularly elevated.

However, Lachman believed that the Fed is "highly unlikely" to engineer a soft landing for the U.S. economy with inflation so high.

"This is particularly the case since the Fed has not only created an inflation problem, it has also caused an equity, housing and credit market bubble. There has to be the risk that once the Fed starts raising interest rates in earnest, we will see those bubbles bursting and that bursting will produce a deep economic recession," Lachman said.

Swonk noted that her own analysis suggests that seven rate hikes, coupled with the crimp on spending triggered by the surge in prices associated with the Ukraine crisis, would bring U.S. economic growth down below 1 percent in the second half of the year.

"That is not enough to keep the unemployment rate from rising. Additional rate hikes could easily trigger a recession," she said.

Former U.S. Treasury Secretary Lawrence Summers also warned that the Fed's current policy trajectory is likely to lead to stagflation and ultimately a major recession, with unemployment and inflation both averaging over 5 percent over the next few years.

"Indeed, (the) recent research that I conducted with my Harvard colleague Alex Domash shows that overheating conditions of high inflation and low unemployment are usually followed, in short order, by recession," Summers wrote Tuesday in a Washington Post op-ed.

Global debt concerns

The IMF has warned of higher debt burdens for months as the Fed's upcoming rate hikes will push up global borrowing costs significantly and strain public finances.

"Public finances will come under strain in the coming months and years, as global public debt has reached record levels to cover pandemic-related spending at a time when tax receipts plummeted," the IMF said in an update to its World Economic Outlook report released in January.

"Higher interest rates will also make borrowing more expensive, especially for countries borrowing in foreign currencies and at short maturities," the IMF said, noting high post-pandemic debt burdens will be an ongoing challenge for years to come.

Global debt rose to a record 226 trillion U.S. dollars in 2020 as the world was hit by the pandemic and a deep recession, according to the multilateral lender.

Historically, Fed hiking cycles can be a headwind for emerging market debts, as higher yields in the United States make emerging market securities relatively less competitive in the struggle for global capital, analysts said.

In addition, more aggressive Fed rate hikes could rattle global financial markets, leading to capital outflows and currency depreciation in emerging markets and developing countries, they noted.

"Never before have they been as indebted as they are today. This makes them very vulnerable to an interest rate hiking cycle and to any slowing in the global economy. The World Bank is warning us to be prepared for a wave of emerging market debt defaults," Lachman said.

The average total debt burdens among low- and middle-income countries increased by roughly 9 percentage points of GDP during the first year of the pandemic, compared with an average increase of 1.9 percentage points over the previous decade, according to the World Bank.

"Higher interest rates make debt service more expensive, reinforcing the trend of recent years, and weaker currencies make debt service more burdensome relative to the size of the economy. Liquidity problems could suddenly morph into solvency problems," said World Bank Group President David Malpass.

"Emerging economies need to rebuild their buffers and avoid sacrificing the accumulation of capital-both physical and human-along the way. The path chosen for fiscal consolidation is critically important in this respect," Malpass said, adding advanced economies should carefully unwind the extraordinary stimulus policies and avoid creating global turbulence.

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