Fed's rate cut likely to increast inflation concerns

After two tumultuous days on wall street, it sure feels like a Sauna. 250 pt advance follows a 290 point drop, all at the whims of institutional traders who are trying to play macho against Bernanke. Despite what some experts are saying, in their attempt to explain the recent volatility, I think it's very simple. The market is showing Bernanke that if the Feds do not come to the rescue, stock market will tank. Coupled with a weak housing market, the combined effect would be disastrous to the American economy.

So now the Fed most likely will act at their Friday meeting. Bernanke has lost the battle with the Street, and he will be forced to cut rate. At the very least, signal that a rate cut is due soon. No more will he be able to make speeches about how American economy values free market mechanisms and everything will sort out itself without the government taking actions. \

Free market economy worked great for America, up until now. The global economy now is so intertwined, U.S. government must act in order to help the U.S. economy. Hell, the whole world is doing it, especially the developing nations. When economic super powers like China and Russia are dictating how their economy grows, through subsidies and regulations, U.S. will lose out by playing the old/outdated cards.

Now that Fed will cut rate in order to boost the economy, we will see the stock market jump on that information. Although we have to be extremely cautious about inflation. With materials and natural resources prices jumping through the roof, inflation has been a big concern for the Feds. That is why they are so reluctant to cut rates. On the one hand, sub-prime woes demands a rate cut in order to stabilize the credit market and the financials, on the other, cutting rates now would only boost inflation. Interest rate is really the only weapon the Feds have against inflation. And to cut rates, it fuels more borrowing and lending, and thus increases costs of doing business and ultimately prices. The dollar would be worth as much, when you pump more liquidity (cash) into the market. Investors need to protect their portfolios with some inflation guarded stocks. Oil companies are always a sure bet, along with consumer cyclical.