Cutting 75 basis points rather than the expected 100 basis points gave the Fed positive near term reinforcement from market participants:

• Dollar went up
• Food/fuel/commodities went down
• Stocks did ok, including housing companies
• Credit did ok

But it’s going to look to the Fed a bit like taking medicine: initial small doses have the desired effect, then things settle back, and it takes ever larger doses to keep moving the needle.

So now crude/food is moving back up, the USD is moving back down, stocks are doing ok, exports are booming, and the fiscal package is about to kick in.

For the Fed to keep moving the needle away from inflation it’s going to keep needing to not give markets all they are anticipating.

So with a 25 cut anticipated, they will realize they need to do no cut for a positive inflation response, and with no cut anticipated they need to hike, etc.

Credit markets will quickly get ahead of this and begin anticipating hikes.

The irony is higher rates will help support demand via the interest income channel.

And higher rates will support price increases via the cost channel.

Demand is being supported by increasing net fed spending and rising exports due to the reduced desires of non-residents to accumulate USD financial assets.

They no longer want to accumulate a net $60 billion a month of US financial assets (negative trade gap) due to the big 4 screaming fire in a crowded theater of previously content patrons:

1. Paulsen calling CBs that buy USD currency manipulators
2. Bush making it politically impossible for Muslim nations to further accumulate USD reserves
3. Bernanke giving inflation a back seat to ‘market functioning’ via deep rate cuts into a triple supply shock
4. Pension funds diversifying to passive commodity and non US equity strategies