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In the Hot Seat

Ben Bernanke will face Congress Wednesday to deliver the Fed’s biannual economic report. But could the outlook be different now that inflation is flaring?

Deutsche Bank Chief Economist Joe LaVorgna doesn’t think so.

Just Tuesday, Fed VP Donald Kohn said the central bank is more worried about growth than inflation and hinted at further rate cuts. And the Fed futures market is still betting – to the tune of a 95% chance – that Bernanke will cut 50 basis points at the March meeting. There could be a pause in April when interest rates would then be low given inflation, LaVorgna said, but don’t expect Tuesday’s inflation report to be a game changer for Bernanke’s testimony or what the Fed intends to do when it meets next month.

Look on the bright side, LaVorgna offered. If there is an inflation problem, the Fed will raise rates and that will mean there’s no credit crunch. “We could live with that.”

If inflation does rear its ugly head, the traders put together an inflationary basket of stocks and funds:

-Guy Adami’s inflation play is Raytheon . It’s the cheapest of the defense names and the sector is about as recession and inflation proof as they come.

-Pete Najarian added Hormel and Heinz to the basket, offering that food companies with lots of international exposure are perfect for combating recession and inflation at home.

-Every time the Fed cuts rates it murders the U.S. dollar. That’s why Jeff Macke put the oil ETF and the gold ETF in the inflation basket. Buy the trends, he said.

-Karen Finerman played it safe and chose the iShares Lehman TIPS Bond . If you fear inflation, what’s better than buying the inflation index? TIP is not very volatile so, while unlikely to surge in either direction, the fund is a nice place of protection.

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GLD
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HNZ
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HRL
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RTN
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ISH BAR TIPS
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USO
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