The Fed is so screwed. Economic growth has slowed to a crawl at best, housing prices are taking forever to adjust down after the bubble, credit markets are panicky like Mungowitz when there is only one six pack left in the fridge, and inflation is on the rise.
Now it seems clear, given that markets are expecting a 3/4 to 1 percentage point cut in the Fed Funds rate later today, that the consensus opinion is that the Fed is committed fighting recession and ignoring inflation risks.
On the one hand, this makes sense because a recession is probably more painful than some extra inflation (which presumably the Fed would slowly bring down after the crisis has passed). On the other hand though, it doesn't make sense because the Fed can actually control inflation and its main policy tool, the rate cut, stands little chance of averting a recession especially compared to its chances for further aggravating inflation.
Now Mrs. Angus and I both have tenure (and university enrollments are still booming for the time being) and we are planning a foreign vacation this summer, so maybe my views are totally skewed by my own self-interest here, but I think the Fed is making a mistake. They can pursue their lender of last resort function (which I think is good policy given our credit market panic) without also pursuing their panderer of first resort path of continuing to cut the funds rate.
People, we had a huge asset bubble burst and the asset in question (housing) has slow price adjustment. Cutting the Funds rate won't change this.