Measure Twice-Cut Once. What happened?

MEASURE TWICE...CUT ONCE. And like this old saying advises, Fed Chairman Ben Bernanke and his Federal Open Market Committee probably measured their decision quite a few times before making their recent ..50% cut to the Fed Funds Rate. But if the Fed's history of making cuts and hikes in cycles continues - this cut is probably not a "one and done".

Here's what the Fed had to say as they announced the cut: "Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time." This means that the Fed will take whatever steps are necessary in terms of rate cuts to try and prevent a possible recession, so long as inflation remains in check.

Initially, both Stocks and Bonds rallied on the comforting words from the Fed - but as Bond Traders analyzed the potential future impact of the Fed cut over the following days, they started selling off Bonds with both hands, causing fixed home loan rates to rise by ..125 to ..25%, actually higher than where they stood before the Fed Rate Cut. What happened?

Traders realized that a Fed Funds Rate cut could encourage increased spending by consumers and businesses, as borrowing costs will now be cheaper for Home Equity Lines of Credit, consumer loans like car loans and credit cards, and business loans as well. In turn, increased spending can translate into increased inflation in the long run - and inflation is bad news for Bonds. Bonds deliver a fixed rate of return, and the value of that return is eroded by inflation. So Bond Traders sold, the price of Bonds moved lower, and home loan rates moved higher as a result. Counterintuitive to many...but its reality, and now you understand what many do not - including much of the mainstream media