Fed caught in the corner

I have been wondering when this would finally play out. In each of the last few Fed statements a strengthening concerning inflation has been stressed. Along with this an increasing concern about the economy, financials (CDOs, SIVs, MBSs and who knows what else has yet to be disclosed), credit, homeowners. What's a Fed to do? On one hand lowering key rates (100bp now) is supposed to help the aforementioned economy, financials, homeowners, etc (we have yet to see any real help). On the other hand if inflation is a growing concern lowering key rates will only make the inflation front worse. If the market needs liquidity (pumping cash into the system) how can this be accomplished given the implications increased liquidity will have on inflation. I think the market was disappointed today because the action and the accompanying Fed statement effectively stated that we are boxed in a corner and therefore will do nothing (25bp was seen as nothing).

Below is the text of the Fed statement copied directly from the Federal Reserve website.

Press Release

Release Date: December 11, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.