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The Fed was more hawkish than expected

A concern about a weak global economy and a lack of inflation has prompted the Federal Reserve to leave interest rates unchanged ... again. As Janet Yellen spoke, I was listening closely for hints of a policy shift toward a higher inflation target.

Rodrigo Garrido | Flickr | Getty Images

The Fed's initial statement was much more dovish (worried about the economy) than most market participants were expecting, including myself.

Interestingly, the subject discussed at the Fed's Jackson Hole gathering was exactly what the Fed IS concerned about — inflation, or lack thereof. The solution (according to many of the papers presented) is to target a higher level of inflation, perhaps as high as 4 percent.

Was there a hint of a shift in policy when Yellen spoke? Nope.

In fact, the Fed has inadvertently created a environment where its lack of action will exacerbate the deflationary trends. There isn't much the Fed can do when interest rates are already so low.

Theoretically the Fed could opt for a fourth round of quantitative easing, but the bar for that type of action is so high that it is beyond current market reality. Interestingly, Fed Chair Yellen could hardly hold back her laughter when asked about the one Fed governor who called for negative U.S. interest rates. Her reaction said it all: The Fed is so far away from easing monetary policy that it is laughable.

The focus now will turn to the "other" central banks, in particular the European Central Bank, Bank of Japan, and People's Bank of China. The Fed's lack of action has provided ample cover for each of the banks to continue with monetary easing. When these central banks get back in the money-printing game, the U.S. dollar is likely to continue its rise, and as we know, a rising dollar is deflationary. While the Federal Reserve may have thought it was being cautious, dovish and prudent, it actually was being hawkish (more worried about inflation than the slow economy).

The question for investors is, what does this all mean for asset prices? As we have seen in the last 24 hours, the global stock markets are not taking a positive view of Fed inaction. Given the deflationary environment the Fed has created, it is likely that this selloff continues.

The prudent investment is quickly becoming gold as a hedge against central bank policy mistakes. As we get more clarity on the extent of foreign central bank actions, there will be opportunities to reposition portfolios, but until then, caution is the name of the game.

Brian Kelly is founder and managing member of Brian Kelly Capital LLC, a global macro investment firm catering to high net worth individuals, family offices and institutions. He is also the creator of the BKCM Indexes, benchmarks for multi-asset money managers. He's also the author of the upcoming book, "The Bitcoin Big Bang: How Alternative Currencies Are About to Change the World." Kelly, a CNBC contributor, often appears on "Fast Money." Follow him on Twitter @BKBrianKelly.