Stagflation is here... Bernanke is in a pickle

Inflation and recession = stagflation. This is a very dangerous position for the US economy and the Fed has the mandate to keep inflation low even if they have to push the economy futher into recession by raising interest rates. When Bernanke and the Fed lowered interest rates fast and furious they signaled that they may raise them just as quickly to avoid the same problems of the Greenspan era.

"The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."

This type of uncertainty with slowing growth is very bad for the stock market and rising interest rates is very bad for the bond market.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability."

The Fed will act and must act to keep inflation in control. Gas prices may go from $4 to $5 a gallon and oil could top $150 a barrell in the near term (especially if a conflict erupts between Isreal and Iran). Prices for just about everything from food, durable goods, etc. are all rising as companies try to push higher production costs on to the consumer, however, the consumer is strapped for cash and may not be able to handle it.

The DOW has officially entered a bear market... down - 20%. The volatility should continue throughout the rest of 2008 and may get worse after the Presidential election. Housing prices will continue to fall due to foreclosures flooding the market and rising mortgage interest rates with strict underwriting standards. Eventually the job market may really start to sour so make sure you save for a rainy day because it is coming very soon. However, with every bear market you have opportunity to purchase large well established Blue Chip companies at bargain basement prices.