Assuming the Fed Hikes Rates, Where Will Investors Flow?

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By Jacob Maslow

interest ratesCurrently, there is a big debate as to where financial market players will go once the inevitable happens. The US Federal Reserve has been making a lot of noise for quite sometime regarding interest rate hikes. According to the US Federal Reserve projections, the US economy will reach a point where it will begin to overheat, and inflation becomes a serious problem.

You have to understand why the US Federal Reserve seems to be so paranoid about inflation. Any measurement of inflation would show that inflation is pretty much dead in the United States. There’s still some inflation but it’s definitely far from being a problem. The reason why the US Federal Reserve is very skittish about inflation is because it knows that inflation is the natural effect of all the money printing it did. The US government printed trillions of dollars worth of money to buy up private and public bonds. It bought up all these bad debts and bad assets, and it used this magical money, thanks to the US Treasury’s printing presses. The US Federal Reserve is scared about the natural result of such activities.

In normal times, if any government lets its printing presses run on overtime and just produce tons of money, that huge flood of money is going to result in runaway inflation. The most recent example of this is Zimbabwe. There were actually trillion currency notes in Zimbabwe and that probably wasn’t enough to buy a loaf of bread. That’s how nasty inflation is. The US Federal Reserve knows this, and that’s why is scared as to the inflationary effect of quantitative easing.

Assuming that it does make the move and pulls the trigger, where will the market go? According to current trends, it appears that the smart money is betting on the dollar appreciating further. This is almost a sure shot. This is like very hard to screw up. In fact, traders are so confident that the dollar would appreciate handsomely from any interest rates hikes that these investors are preferring the US dollar over treasury bonds. This is a quite big news because normally during interest rate hikes, bonds win out.

It’s obvious why the market is trending this way. The reason why the US dollar is so strong is not because of any breakout strength in the US economy but because its competition, the Japanese yen and the European euro, are so weak thanks to quantitative easing.

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