There are days when the U.S. Federal Reserve probably feels like it's part of a well-researched, coordinated public policy effort to both keep the U.S. economy growing at an acceptable rate with low inflation, and serve as an engine for global growth. Then there are days like today, when the Fed undoubtedly feels like it's out there on its own, like that well-known bald eagle -- a solitary guardian amid ever-present risks and dangers.

The Fed meets December 11 to decide whether to continue to ease monetary policy. The consensus among economists and Wall Street analysts is that the Fed will lower key short-term interest rates by a quarter-percentage point to 4.5%, with some analysts predicting a half-percentage point cut by the Fed.

In an effort to stimulate domestic demand amid a U.S. economy slowed by subprime mortgage defaults, the Fed has twice lowered key interest rates this year, cutting the Fed funds rate -- the rate banks charge each other -- to 4.50%, and the discount rate -- the rate the Fed charges banks for short-term loans -- to 5.00%.

Still, it's not a cut-and-tried case of simply lowering interest rates to stimulate commercial activity and increase U.S. GDP growth. Price stability -- the Fed's other primary responsibility -- is being pressured by rising commodity prices, especially oil. Consumer price inflation is expected to top the Fed's target zone in 2007 and will probably exceed 3% this year.

Hence, the Fed is faced with one of its toughest challenges since the dawn of the globalization age: To find a policy that could provide enough stimulus to offset the contraction effects of the housing sector's correction and subprime mortgage defaults, while also keeping inflation in-check. The Fed will most likely receive some fiscal policy help from Washington in the form of a Bush Administration-sponsored plan to bail-out and/or partially insure the subprime mortgage market. But economists and analysts are quick to point out that the fiscal policy lag effect means that any fiscal stimulus provided won't be felt by the economy for 3-6 months, perhaps longer.

OPEC of little help

Recent international economic events and decisions have provided little help for the Fed. OPEC decided on Wednesday not to increase oil production, Bloomberg News reported, an action many analysts say will help keep oil, currently trading around $89 per barrel, at lofty levels. Further, with U.S. Q3 productivity statistics showing strong growth for the year and labor costs in-check, commodity prices -- especially oil -- represent the biggest factor in rising U.S. inflation. Hence, any OPEC decision that keeps oil prices elevated doesn't make the Fed's job any easier.

"The Fed is really getting no help from OPEC," Andrew Resnick, an independent currency trader told BloggingStocks Wednesday. "Here's the Fed, trying to maintain sufficient liquidity in the markets and provide monetary policy stimulus after all the subprime defaults, and OPEC refuses to increase production, which will put pressure back on oil prices. That will increase inflation and it makes the Fed's job that much harder. That's a really irresponsible move by OPEC, in my view."

In OPEC's defense, the cartel argues that oil's current $88-90 price does not reflect market fundamentals -- that "the markets are well supplied," in Saudi Arabia Oil Minister Ali Al-Naimi's phraseology -- and that investors, including speculators, have artificially-boosted the price of oil.

Oil-fed inflation

Still, regardless of global oil supply evaluations, persistent elevated energy prices have increased inflation in the U.S. and globally, many economists agree. And it's that uncomfortable-level inflation that's partially creating a challenging obstacle course for the Fed.

"It's a dilemma, no question, for the Fed," Economist Steve Affinto told BloggingStocks Wednesday. "On the one hand, they have to stimulate growth in the face of an obvious slowing of the economy, due to housing's problems. Right now we're headed toward 1% GDP growth or worse for 2008. But on the other hand, the Fed also has to keep an eye on consumer prices. If inflation accelerates, that would be an argument against future interest rate cuts."

Affinito said he expects the Fed to cut its key rates by one-quarter point, with the Fed also noting in its comments "that the Fed remains ready to provide funding to ensure liquidity and the proper functioning of the credit markets."

"I think the key part of next week's decision will be the Fed's stance regarding emergency funding. I think they'll telegraph to the markets 'We're not going to violate moral hazard, but we're not going to tolerate runs on institutions that would otherwise survive without a run on their funds,' " Affinito said. (Moral hazard refers to the economic theory that argues that unprofitable institutions should be allowed to fail. If they're rescued by the government, the government would be encouraging poor/unprofitable business practices and decisions.)

"With the [December] rate cut, that should be enough to keep the markets calm and stimulate some growth for Q1 and Q2 2008," Affinito added.

Coordination with ECB?

Resnick said he believes it's going to take not only a dialogue on liquidity issues between the Fed and European Central Bank, but also coordinated monetary policy stimulus between the world's two largest economic zones to get them through the effects of the housing correction. Resnick added that he believes the two central banks have already coordinated a stimulus plan, with back-up plans, etc.

"It's clear now that the size of the housing drag will require more than one central bank's stimulus. The ECB will need to stimulate, too, and they will," Resnick said. "Some leaders in Europe will be against it because it will increase euro-zone inflation, but the stimulus is needed to keep both continents growing in 2008. You've got housing slowing the economy, high oil prices slowing the economy, so this is one case where the stimulus has to be intercontinental, and sustained."