Author: WEN Bin，LI Xin and WEN Yuli

In order to battle the soaring inflation，the Federal Reserve (Fed) has started raising interest rates since March 2022 at an accelerating pace. A single rate rise in June and July reached 75 basis points，the most aggressive hike since November 1994. Historically，the Fed’s rate hikes often led to financial crises in some countries and regions. Will this round of rate hikes trigger financial crisis? Which countries are more vulnerable?

How do the Fed’s rate hikes provoke financial crises?

In previous process of “Fed’s rate hike—capital outflows—financial crisis”，the most common and critical link is the currency crisis. Although it is usually caused by a debt crisis or the bursting of an asset bubble，sharp currency depreciation can exacerbate debt crises，banking crises，and financial market meltdowns，further escalating into a full-blown crisis. However，the Fed’s interest rate hike is only a common external trigger for each financial crisis，while some economic factors within a country are the main culprit. These internal factors broadly fall into four categories are as follows.