Inflation Reflation

With the Fed's recent lowering of the Fed funds rate by .5%, and the discount rate by .5%, the stock market experienced the largest one-day rally in 4 years. At the same time, commodities prices exploded higher. So what's going on? First, short covering in the stock market is part of the rise, and the added liquidity rushing into the market was caused by the surprise move. Commodities also pushed higher, including gold, because the Fed's move is seen as inflationary. Lowering rates like this will continue to weigh on the U.S. $, which is inherently inflationary to U.S. consumers who lose purchasing power, though certain asset classes have benefited in the short term.

Right now this Fed move should favor two trends: commodities and commodities-related company earnings, and U.S. multinational corporate earnings (whose foreign receipts are converted back into a weak U.S. $, which greatly improves their net earnings due to currency translation).