The Federal Open Market Committee issued its decision on interest rates Wednesday. It kept rates unchanged as expected but increased the hawkishness of the accompanying statement. It maintained its credentials on combating inflation but was careful not to cause any trauma to the financial markets that would require reversing this position. If this were to occur, the Fed would lose credibility.

The Fed wants to maintain its credentials on inflation control. This is necessary for it to protect the dollar from an uncontrolled spiral downward and an increase in core inflation. However, there is very little that the Fed can do to limit total inflation in the short term. The current inflation is really being primarily driven by the rise in oil prices. This is being caused primarily by the increase in demand in emerging markets, such as China and India. Fed policy has little effect on this. Oil prices rose throughout the last Fed tightening cycle despite the rise in the yield on short-term Treasury Bills.

Oil actually began its rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

The Fed could raise rates substantially enough to cause a global recession. This could cure the inflation problem. However, in this case the cure might be worse than the disease!

Also, the domestic economy is still quite weak. Despite indications in the FOMC statement that the economy is firming, there were several caveats indicating that risks remain. We have seen virtually no significant improvement in the recent housing and employment reports. The Fed cannot risk raising rates in this type of environment.

The best way to fight the inflation battle currently seems to be with a war of words. Even in this scenario the Fed must be careful to leave all options open to deal with any additional economic weakness or crisis.

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street . He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.