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The Fed Is Handcuffed & Markets Could Drop 30%

|Includes: EWJ, QQQ, SPDR S&P 500 Trust ETF (SPY), UUP

The Federal Reserve is potentially in big trouble after this mornings CPI (Consumer Price Index) Report. While the headline number came in at 0%, the core (minus food and energy) came in at 0.3%. This was slightly more inflation than expected and if we start seeing this trend continue, it kills any chance of negative interest rates as an option for the Federal Reserve. Negative interest rates was the last silver bullet the Federal Reserve had in its arsenal, after years of quantitative easing (printing money) and zero interest rate policy. Note: Japan has done it recently, so far without any benefit.

While the markets are not worried about it at this point (1 data point does not make a trend), it is likely any future inflation signals along with any weakening economic indicators will panic the market to the tune of a full 25-30% correction off of the all time highs on the S&P 500. My projections show one more short squeeze to the upside to around the 2,000 level on the S&P, followed by another bigger leg down to as long as 1,575.

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Jenny Rebekka