Fed shows it's still concerned about inflation, too

Traders and clerks work the Eurodollar options pit at the Chicago Mercantile Exchange Tuesday, March 18, 2008, shortly after the Federal Reserve slashed a key interest rate. (AP Photo/M. Spencer Green)

by Frank James

The Federal Reserve may have disappointed many investors who had hoped to see the central bank cut the federal funds rate a full percentage point, instead of the .75 percentage point cut the Fed delivered.

But the Fed did a few things by not fulfilling expectations.

First, it showed that it isn't neglecting the part of its mission which has to do with fighting inflation. Inflation hawks have worried that the Fed was ditching its inflation-watchdog role to try and goose the economy.

The Fed sent the message that it isn't doing that at all, that it's still manning the barricade on inflation.

In fact, it makes a pretty big deal about inflation in its official statement:

Inflation has elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

By providing less stimulus than many thought it would this time around, the Fed is also trying to keep itself from running out of bullets.

Reducing the federal-funds rate too far too fast could leave the central bank without an important tool if the recession which many experts believe the U.S. has entered turns out to be longer and deeper than other recent recessions.

Still, the Fed had plenty for those who are worried about recession to grab onto. High up in its statement, it said:

Recent information indicates that the outlook for economic activity has weakened further. Financial markets remain under considerable stress, and the tightening of the credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Later, it added:

... However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

So there was something for both inflation hawks and recession doom-and-gloomers, which probably means the Fed did about the best that could be expected of it right now.