This is what I have just written over at Economist's View:
I'm very unhappy with the rate cut. Like Fred, I think Higher interest rates are needed but the reason I have is the incipient inflationary pressure building up because of the low dollar.
Of course, there is the question of whether or not the deflationary effects of a potential recession will counteract the inflationary effects of a lower dollar. History has shown us that nations with plummeting currencies end up having both a recession and an outbreak of inflation at the same time. It happened in South America and it happened in Asia and it happened in Russia.
The difference between the regions just mentioned and the situation in America as its stands is that the devaluing of currencies was essentially what caused their recessions. In America's case, however, a recession was already brewing. The plummeting dollar results from this problem, and will exacerbate it.
At some point in the next three months, inflation indicators will begin to get quite loud. At that point everyone will be confused and say "why do we have inflation AND a recession"? Of course Americans are not used to the inflationary effects of a plummeting currency, which means that analysis has been blinkered. American analysts and economists, unused to experiencing inflationary conditions, have completely factored out the inflationary effect of the Fed's rate cut. When it is realised that America is actually no different to the rest of the world and that the basic laws of economic activity actually DO apply to America as well, there will be a clamour of activity arguing that higher inflation is justified in order to keep the markets running and people in jobs. A minority of economists and commentators will invoke Paul Volcker and the rate increases of the early 1980s as evidence that inflation needs to be conquered first, but then the pro-inflation majority will probably argue that the fundamental laws of economics has changed and blah blah blah.
Now that the Fed has acted accordingly, there is a good possibility that America will see out 2008 with comparatively high inflation. Presidential candidates will stutter in their solutions, many simply blaming Bush and Greenspan and occasionally Bernanke. A stimulus plan from congress will go ahead but will actually do little in stopping the recession and will have an inflationary effect. At some point after the election, Bernanke will either resign or be sacked.
I also predict that at some point the Fed will realise what is happening and increase rates to kill off inflation. This will cause a double-dip recession.
So, that is my prediction. If I get it right, will someone out there in the world of business reward my prescience? Online Kudos is one thing. Cold hard cash is another.