Storm incoming.

THE shockwaves of a monetary policy decision taken yesterday halfway around the world will soon rumble through our economy. In its Wednesday announcement, the US Federal Reserve - the US equivalent of our State Bank - hiked its policy rate by a whopping 75 basis points in an attempt to cool down inflation, which exceeded expectations in the month of May to rise to the highest level in more than 40 years, according to official data shared last Friday.

US stocks have already fallen sharply this year and are now officially in a bear market, while the dollar is on track to touch its highest in the 21st century. Wall Street is now warning that the US economy may be entering a recessionary period as soon as August. The fortunes of the US economy have a significant bearing on the rise and fall of almost all other economies of the world due to the interconnectedness of global trade and financial systems.

Read more: A crisis like no other

Pakistan, with its heavy dependence on foreign capital flows and trade, stands particularly exposed. The fallout of the Fed's decision will be wide on Pakistan's economy. Stocks are likely to take an immediate battering, while the rupee-dollar exchange rate will inevitably slip further. The deterioration of the exchange rate will, in turn, make imports - including fuel and palm oil - even more expensive than they already are.

Higher US interest rates will also hurt foreign portfolio investments in Pakistan, as individuals and corporations will be looking to take advantage of low-risk returns. Similarly, as an economic slowdown - or recession - takes hold...