The Fed's job isn't getting any easier

No one ever said serving on the U.S. Federal Reserve Board of Governors was easy. Next Wednesday's Fed meeting may provide a case study regarding just how difficult that job is.

The FOMC, led by Chairman Ben Bernanke, will be asked once again to address the health of the U.S. economy amid two contrasting views of reality. To be sure, different interpretations regarding the U.S. economy is not something the Fed has never encountered: they're the essence of the arena of ideas that flourish in a free society, and part of what makes a market "a market."

The Fed, it seems, is perpetually trying to sift through the arguments (and data) of those who believe inflation is too high and those who believe the U.S. economy is growing too slowly.

Further, setting the appropriate policy would be somewhat easier if the Fed knew that only domestic factors determined either economic condition. But the Fed knows that is not likely the case.

One example: The Fed lowers short-term interest rates, as it did a month ago, to begin to stimulate the slowing U.S. economy, only to find that its counterpart, and the world's second most important central bank, the European Central Bank, is not. Of course, it's clear that the ECB is undertaking the monetary policy appropriate for the euro zone, but it's also clear that the policy hurts the U.S. economy's ability to grow at a time when the Fed is undertaking a policy to achieve that goal.

Another example: Conversely, when the Fed maintains short-term interest rates, as it did last year and early this year to control inflation, China, Asia, and most other emerging market economies continued to increase oil consumption -- a condition that helped push oil above $85 per barrel -- a major contributor to U.S. inflation. True, U.S. oil consumption is per capita the highest in the world, but few would deny that, along with U.S. demand, emerging/international market oil demand is stoking both oil's price and U.S. inflation. In other words, it hurt the Fed's inflation control effort previously, and it's hurting it today.

Fed Analysis: Given current conditions, it's likely the Fed on Wednesday will lower the federal funds rate by another quarter percentage point, to 4.50% from 4.75%. In September, the FOMC surprised most in the financial markets by lowering by one-half percentage point its key lending rate, to 4.75% from 5.25%, the first rate decrease in more than four years.

The monetary policy easing is expected to provide domestic stimulus to help recharge the U.S. economy while not re-stoking domestic inflationary pressures, qualified by the fact that international factors may hinder the Fed's goal.