The Federal Reserve’s hike in the discount rate for the first time in three years is a warning shot.
It's the first part of a larger plan to fight off inflation while attempting to not rattle the markets in the meantime.
That's why the Fed tried to play it down by reiterating their stance of keeping rates low.
However, six months ago, inflation was at negative 2.1% on a year over year basis.
Now it stands at plus 2.7%.
So, we went from some serious deflation to a fair degree of inflation fairly quickly.
The momentum of the inflation is what concerns me. And I'm sure it is what concerns the Fed, too.
Sooner or later, they'll have to fight it to help to ensure it doesn't get out of hand (which is likely to happen anyway).
I know they don't want to do it because unemployment is still very high.
But there have been periods in history to where we've had to hike rates anyway (such as in the 1970s under Paul Volcker).
We will likely experience this once again, and it's not going to be pretty.
So, this initial discount-rate hike of one-quarter point is the beginning stages because it helps to wean banks off of the central bank for their short-term funding needs and turns them back to the money markets.
The dollar rallied because investors know that interest rates will have to be raised.
Also, gold, silver and oil posted healthy gains.
Therefore, this will cause the dollar to continue to rally against most of the major currencies.
The tough economic environment, coupled with interest-rate hikes and the
Obama administration's tax increases to come, will kill stocks.
Since stocks will fall, the yen will benefit as investors run from riskier assets to assets that they feel have been beaten down longer term.
So, the dollar and the yen will be the clear winners during all of this.
The euro will be the biggest loser.
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