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.

Yesterday I was stunned to learn that Fed Chair Ben Bernanke had cut the Fed Funds rate 50 basis points to 4.75%. However, I had predicted that if he did cut the rate that much, the Dow would soar between 200 and 300 points. My high end estimate was 30 points too low.

What worried me the most about the cut was that the stated reason was pretty vague -- something about the risks to growth outweighing those to inflation -- and not supported by any numbers. Then I read this morning's New York Times [registration required] which suggested that at last month's Fed retreat in Jackson Hole, WY, economists presented economic forecasts based on the assumption that housing prices decline between 20% and 40% in the next several years.

I doubt the Fed's rate cut can do much to stop this problem -- although borrowing more money might delay the worst effects until the next president is in office. If this is the reason for the unexpectedly large interest rate cut, Fed officials should say so. While we have no power to decide interest rates, in a democracy I believe we at least have the right to know why those decisions are made.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

As the Wall Street Journal covered [subscription required] today, Treasury Secretary Paulson made his first comments since the beginning of the 'downturn' in U.S. markets.

According to Mr. Paulson, "the economy and the markets are strong enough to absorb the losses." In his eyes, the recent repricing of risk was "inevitable" -- an argument that makes sense in hindsight but it seemed to catch many experts to surprise.

In Paulson's eyes there isn't much more that the U.S. government can do to help the economy and stock market. It has already tried to increase transparency among hedge funds, according to the article. However, the rest of the 'action potential' lies in the hands of Bernanke and the Fed. I've spoken to several very smart investors recently who are all becoming increasingly convinced that Bernanke is going to have to cut rates sometime in the next few months to save the credit markets. While this seems dramatic, the current devastation in the fixed income market, especially in the much-publicized subprime mortgage space, is rather incredible.

But the more important question to ask, in my opinion, is whether or not Paulson could have really said anything different. While I'm sure many would argue the answer to that question is an astounding yes, at the present time you have to reflect deeply on that question. Would he really say the United States could potentially enter a recession with the markets as fragile as they currently are? Would he really risk further weakening the US Dollar versus other world currencies? I'd argue the answer is a no.

As a girl who considers herself hip to the news, from Main Street to Wall Street to pop culture, I'm always on the lookout for trends. And the past few days I think I've spotted one, which I like to call "Too MAD Money." It's a riff on Greenspan's irrational exuberance. Let's look at the factors:

• The U.S. economy has fallen with a thunk off the top of the World Economic Forum's competitiveness survey. Replacing the States from its perch atop the economic heap: Switzerland. The U.S. is now sixth and Switzerland was lauded for its efficient markets and "sound institutional environment."
• This must mean that the U.S. is not, indeed, sound, or efficient. At least, not so much as Switzerland, Finland, Sweden and Denmark. Zoinks! Crushed by those efficient northern Europeans.
• At the same time, the U.S. indices are nearly all-time highs.
• At the same time, the U.S. economy is showing signs of a coming slowdown.
• And then, I read this headline: "Mad Money ... Mad Market." Albert Phung from Investopedia argues that Jim Cramer's famous "effect" is proof that the U.S. market does not behave efficiently. And suddenly, it all makes sense.

It's all Cramer's fault. Well, it's not really Cramer who's causing the irrationality and inefficiency, but his audience and the media types who fuel him. Because of the dozens of web sites who eagerly track his recommendations (as she puts her face in her hands, looking at her own blog), because of the millions who eagerly buy his recommended "Booyah Buys" and sell the ones which "don't have legs." Because of the endless promotion of some testosterone-fueled market-watcher by the CNBC engine and countless others. Because of you, who clicked on this link...

It's all our fault. We did this! Now get out there and buy rationally, people!

Yesterday I was raked over the hot coals by several readers that feel we are doomed by a housing bubble that I would not accept. See: Housing Truth from Main Street; which turned out to be quite a controversial post.

I stand by most of what I wrote. However, there were plenty of valuable insights that are worth reflection among the ranting and raving. A particular comment by David Gross, although not very deep is important for its simple summary of many comments. It stimulated a response from me that I thought was worthy of a separate post and further discussion.

David's Comment