Fed chief Jerome Powell's hawkish speech after the regulator decided to leave the policy rate unchanged, to put it mildly, did not inspire investors.
The economy is already suffering the consequences of tight monetary policy, with a growing number of corporate bankruptcies and rising overhead costs. And now, there are even more rate hikes on the horizon.
It is clear that, in time, this could lead to a crisis. Perhaps not as severe as that of 2008, but negative consequences are inevitable unless it is at the expense of future generations.
More specifically, if a recession threat arises, the Fed could again resort to expanding its balance sheet through QE.
However, this will undermine the gains made over the past year. The bottom line is that to achieve price stability and avoid further inflation of the country's debt bubble, the regulator will have to allow some sort of recession.
Otherwise, the regulator will find itself trapped in a vicious cycle: A black swan event occurs that poses a threat to financial stability, the Fed addresses it, but then a new problem arises, or an older one resurfaces.
Considering all this, investors have concluded that the interest rate may rise again and remain at an elevated level for an extended period, thus increasing the bet on the US Dollar.
Meanwhile, the attractiveness of US Treasury bonds, on the other hand, has declined again, and TMF (Direxion Daily 20+ Year Treasury Bull 3X Shares) has reached new lows.
The question now is what will happen next regarding what the rising dollar will mean for the global economy.
Starting with the U.S., the cost of export goods, including components for manufacturers and consumer imports, will become cheaper, which is an advantage in the fight against inflation.
On the other hand, a stronger dollar makes U.S. goods and services less competitive in the international marketplace.
This could lead to lower sales and, consequently, lower incomes. As a result, economic growth could slow, which aligns with the Federal Reserve's objectives. Overall, we could say that a strong dollar currently benefits the United States.
Talking about the impact on other countries, with a stronger dollar, it becomes more expensive for governments to pay their debts using their local currencies.
This could potentially increase the likelihood of sovereign defaults in some nations. The dollar could continue gaining momentum due to the second wave of inflation, driven by rising gasoline prices and a deteriorating economic outlook.
Remember that an increase in recession risk could lead investors to seek safer assets, including cash. Therefore, we could see the DXY above the 107 level over time.
It is also true that once the worst-case scenario occurs, investor sentiment could change dramatically, as dictated by the "buy for new, sell for fact" phenomenon.
What should conservative investors do?
The best thing to do in the current uncertainty is to follow incoming macro indicators, as the data will suggest the direction of Fed policy and the overall outlook for the economy.
