Why is the ASX 200 taking a tumble today?

The S&P/ASX 200 Index (ASX: XJO) is having a day to forget.

As we head into the lunch hour the benchmark index is down 0.7%, having earlier posted losses of 1%.

This comes after the ASX 200 rallied on the back of the RBA's 0.25% interest rate hike announcement yesterday, closing the day up 0.6%. (Full story here.)

So, why the reversal today?

Why is the ASX 200 falling today?

Somewhat ironically, today's woes on the ASX 200 also have to do with inflation, interest rates and central bank policy. Not the RBA though. This time it's the United States Federal Reserve investors are eyeing.

The ASX 200 is following in the footsteps of US markets, which all closed sharply lower yesterday (overnight Aussie time). The Dow Jones Industrial Average Index (DJX: .DJI) led the charge down, sliding 1.7%.

This came on the heels of a hawkish tone set by Fed chair Jerome Powell as he addressed the Senate Banking Committee.

Powell stated:

The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.

Markets are now pricing in the likelihood that the world's most influential central bank will raise interest rates by another 0.50% when the Federal Open Market Committee meets again later this month. That could pressure US markets, which in turn would throw up some headwinds here for the ASX 200.

Commenting on Powell's speech, Anna Wong and Stuart Paul, Bloomberg economists, said, "We now expect the dots tracing Powell's expected path of policy rates – and those of multiple other committee members – to shift higher and stay higher for longer."

LH Meyer/Monetary Policy Analytics economists noted, "Powell's comments make it sound as though they need to be convinced not to speed the pace up. The presumption that's been established is that they will hike 50 [basis points] in March, unless they are convinced otherwise."

Judging by Powell's words, the Fed may take a fair bit of convincing before easing back on their tightening path.

"Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy," he said.

With the ASX 200 looking to be pricing in another outsized rate hike from the Fed, we may already be experiencing the next bump in the road today.