Entering 1998, the U.S. economy was on a tear. U.S. GDP growth was running 4-plus percent and the unemployment rate was 4.5 percent.

Stocks gained 29 percent in 1997 after gaining 38 percent in 1995 and 23 percent in 1996. To cool things down, the Federal Reserve raised the Federal Funds rate to 5.5 percent.

The combination of a robust economy, robust markets and rising rates lifted the U.S. dollar nearly 30 percent higher between 1995 and 1998. As a consequence, oil prices fell 50 percent, punishing oil producing nations.

Also, many emerging economies that borrowed money in U.S. dollars faced punitive repayment costs.

This toxic combination imposed by the surging U.S. dollar led to massive debt defaults, precipitating the collapse of Russia, Brazil and Long Term Capital, a mega hedge fund bailout case in New York.

Between mid-July and early October, the S&P 500 fell 20 percent, leading the Fed to reverse course and lower interest rates by a full percentage point. The markets applauded the Fed’s reversal and rallied fiercely, ending the year up 28 percent.

Investors learned from 1998 that a rapid rise in the U.S. dollar can create chaotic markets and a remorseful Fed.

Fast forward to 2015.

The U.S. economy has reached a steady growth rate of 2-plus percent (not as high as 1998 but comparably high relative to international growth rates).

The unemployment rate stands at 5.1 percent today.

The U.S. stock market gained 14 percent in 2014 after gaining 16 percent in 2012 and 33 percent in 2013.

To cool things down, the U.S. Fed has discontinued its quantitative easing program in late and has vocally contemplated rate increases ever since. Over the period, the U.S. dollar has appreciated by 25 percent and oil prices have fallen 55 percent.

Commodity-producing nations like Russia and Brazil have seen currency values collapse and budget woes surge. Offshore dollar-denominated debt holders have endured punishing repayment costs while nations trying to support their currency values have spent down national reserves.

What happens if the U.S. dollar appreciates even further?

See 1998.

Modernizing 1998 suggests that a Fed mistake could overheat the U.S. dollar and initiate a wave of commodity and emerging market defaults, requiring swift deployment of emergency measures. Were that to occur, the U.S. dollar would weaken, commodities shares would surge and the downforce pressure on the emerging markets would become up force.

Bottom Line

2015 looks a lot like 1998. The tightening bias of the U.S. Fed has led to a relentless rise in the U.S. dollar and the subsequent collapse of commodity and currency prices across the emerging world.

By raising rates, the Fed may intensify the dollar’s damage and invite disruptive defaults. If disruption mounts, the Fed will quickly reverse course to lower the dollar’s value ala 1998.

However, with rates near zero today, the Fed must rely on alternative measures to ease like quantitative easing. Can you imagine QE4?

Ironically, the decision to tighten monetary policy slightly now may result in significant easing later.

If tightening leads to loosening like 1998, Mrs. Yellen, why bother?

David Waddell is president and CEO of Memphis-based Waddell & Associates.