Fed will protect their Federal Reserve Note (a.k.a. U.S. dollar)

With the Fed at 5.25% and the ECB at 2.75%, the U.S. is forced to offer a higher yield on its bonds to give the dollar credibility. If the ECB finds it necessary to move to 5% over the coming year to fight inflation, does it follow the U.S. rate will have to be somewhere around 7.5% or higher? If that scenario plays out, we will be looking at 8.5% mortgage rates…ouch for the housing market!

While many here in the U.S. believe the Fed is somewhere near the end of its tightening cycle, it looks like Japan and Europe could be getting started in earnest to raise rates. Interest rate changes by different countries will clearly play out in relative currency valuations, but overall around the globe interest rates will need to move notably higher to stop price inflation. Excess money creation and historically low interest rates have fueled an increase in consumption of global commodities. Interest rates will have to move higher than expected to slow down economies all around the world (try China at 10% growth). Just when the Fed may want to pause on rate increases, they might not have the choice if rates go up overseas. In the end, the Fed will protect their Federal Reserve Note (a.k.a. U.S. dollar) with higher rates…they have to!