After some of the swiftest interest rate cuts in recent history, some analysts say the U.S. Federal Reserve might soon move to tighten the monetary reins. The Wall Street Journal says traders have reached a "closer consensus that rate increases are on the way, and far sooner than anticipated." The opinion shift, which followed inflation warnings from Fed chair Ben Bernanke, brought a sharp sell-off of U.S. treasury bonds (LAT). Futures markets now price as a near certainty (FT) that the Fed will hike rates by at least half a point by autumn—a sea change from before Bernanke's announcement, when even a quarter-point increase was priced as less than a fifty-fifty chance. It remains unclear when rate hikes would come, and how large they would be. The Journal reported June 17 that the Fed is unlikely to make any changes when it meets in late June, but questioned whether a hike might come later in the summer. Still, it is worth considering the broad implications rate hikes would have, if they happen, both for global currency markets and the battered financial sector.

The intent of rate increases would be to check inflation. Rising oil and food prices have worked in tandem to increase price pressures worldwide. Some of the world's most closely-watched economies—China, India, Saudi Arabia, Russia, and Venezuela—are among the hardest hit. In the United States, the inflation rate currently hovers around 4 percent, below the global average of 5.5 percent. Nevertheless, the U.S. rate has doubled in the past five years, and this surge, combined with pressures from commodities prices and newly-slashed interest rates, has U.S. policymakers concerned. Inflation, they fear, would undermine growth (the economist John Maynard Keynes once called inflation "the best way to destroy the capitalist system"). Bernanke, in his recent comments, said the United States should "strongly resist" any chance of inflation taking hold.

It may seem odd that the Fed would seek to raise interest rates so soon after lowering them. Yet experts say there is logic to Bernanke's maneuvers. CFR's Sebastian Mallaby explained earlier this year that the Fed's rate cuts were meant primarily to stave off a market panic that would further damage reeling credit markets. Speaking at CFR in January, Laurence Meyer, a former member of the Fed's board of governors, said he anticipated sharp rate cuts in the short term, followed by rate hikes aimed at preventing runaway inflation.

Even if a series of rate hikes makes sense, however, it will come with broad economic consequences. Just the hint of increases stirred movement in currency markets worldwide. Several currencies fell against the dollar (Times of London)—a trend that could help steady the U.S. currency, which has plummeted of late. For U.S. exporters, a stronger dollar would dissolve one of the silver linings (USAToday) analysts saw in the dollar's recent slide—the fact that they can now export goods more competitively. On the other hand, a strong dollar would make it cheaper for the United States to import oil, thus mitigating a major contributor to inflationary pressure.

Rate hikes could, however, mean an additional burden for the troubled financial sector. With credit markets still reeling from the subprime mortgage mess, and concerns about other potential problems lingering, tougher borrowing standards aren't something banks are eager to confront. Recent policy reforms by the U.S. Treasury were aimed at easing these sorts of pressures. Depending how high rates rise, and how fast, they could now be put to the test.