Markets sank Monday and the U.S. dollar rallied after Fed boss Jerome Powell warned of more interest rate hikes to fight inflation and poured cold water on the prospects of a cut in the new year.

The hefty selling tracked a painful day on Wall Street, where all three main indexes tanked between three and four percent as investors contemplated an extended period of monetary tightening.

In a much-anticipated speech to global finance chiefs Friday, Federal Reserve Chair Powell said his priority was bringing inflation down from a four-decade high, even at the expense of economic growth, adding that failure to act now would cause more pain later.

"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance," he told the symposium at Jackson Hole, Wyoming.

The comments dealt a blow to markets, which had in recent weeks enjoyed a bounce from June lows as weak economic data and a slowdown in price rises fanned hopes the Fed would temper its interest rate hike drive.

Analysts said the chances of a third successive 75 basis-point increase next month had risen, with US Treasury yields – a gauge of future interest rates – surging.

"The game of assessing the Fed outlook has shifted from guessing how high the peak rate might be to also understanding how long it might stay there for," Yanxi Tan, of Malayan Banking, said.

In Asian trade, investors ran for the hills as they contemplated an era of high borrowing costs with Charles Schwab & Co's Liz Ann Sonders saying that once the Fed gets to "whatever the final hike is, they're going to stay there for a while".

"The market had trouble digesting that," she told Bloomberg Television.

Tokyo, Hong Kong, Sydney, Seoul, Mumbai, Taipei, Singapore, Manila, Bangkok, Jakarta and Wellington were all well down, though Shanghai eked out a small gain.

Paris and Frankfurt were sharply lower in the morning. London was closed for a holiday.

The dollar jumped against its major peers, closing in on the 140 yen mark, not seen since 1998, while an energy crisis in Europe kept the euro depressed.

Still, oil prices extended gains as talk that surging interest rates could choke off the economic recovery was not enough to offset supply concerns.

(Source: AFP with edits)

(Cover: CFP)