Return of Stagflation?

We see that the inflation rate was an astounding 6.3% for 2007 which is 4% above the Fed's comfort range. But wait, the stock market is into the dumpster and the subprime bust threatening a recession (if we aren't already in one). What is the Fed to do? Cut interest rates and invite even more inflation (this is my bet)? Whenever it comes down to making the boys on Wall Street happy and supporting the people on Main Street (by controlling inflation), the Wall Streeters for some odd reason always win out. Go figure.