Others, though, says that such a strategy is too rigid. Central bankers must have the flexibility to respond to such crises as deep recessions and wars. That thinking goes on to reason that the globalization of the world economy -- the mega store phenomenon -- has largely worked to defeat inflation. In other words, suppliers keep prices low so as to not lose market share to competitors.

The Fed cut the federal funds rate from 5.25 percent to 4.75 percent in mid September. It was the first such move since the dot.com bubble burst six years ago and was meant to avoid the possibility of a recession. The lower interest rates, in essence, keep the economy purring along by pouring money into it. Commercial banks will then compete for loans and therefore trim their prime lending rates to consumers and businesses that will take advantage of lower borrowing costs.

The cut in the fed funds rate comes atop an earlier move by the Fed to reduce the so-called discount rate by half of a percentage point. That's the rate in which the central bank will loan directly to other financial institutions. It's all in response to a major drop in the housing sector that has damaged financial markets around the world and led to fears of economic trouble. Fed Chairman Ben Bernanke's philosophy appears to be similar to that of Alan Greenspan, who retired in January 2006.

While Greenspan was determined to fight inflation, he did show on a few occasions that he would loosen the purse strings and cut interest rates during periods of financial difficulties. Greenspan followed Paul Volker, who was forced to fight a whopping inflation rate by raising borrowing costs to record highs and ignoring high unemployment levels -- moves that his supporters say put the nation on the path to long term prosperity.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the Fed's most recent statement says. "Readings on core inflation have improved modestly this year. However, the (Fed) judges that some inflation risks remain, and it will continue to monitor inflation developments carefully."

Comfort Zone

The Federal Reserve can change the amount of money that banks are holding in reserves by buying or selling existing U.S. Treasury bonds, which is referred to as open market operations. This influences banks' decisions to make loans and therefore affects the nation's money supply.

If the Fed buys bonds and increases bank reserves in an effort to fend off recession, financial institutions will then compete for business. That keeps interest rates low. If utilities are able to borrow more to build new infrastructure, total spending increases. Consumer spending on such things as cars and appliances is also affected. Overall production will rise as a result and greater employment will follow. Prices, however, might also jump as the demand for scarce goods and services increases.

If, on the other hand, the Fed sells bonds to reduce the money supply, it will result in higher interest rates and less spending. While such a monetary policy will lessen inflationary pressures, it will also decrease capital expenditures by businesses. In the name of maintaining price stability, total economic output is curtailed.

The Fed's mission is defined by the Humphrey-Hawkins Act of 1978, which essentially says that it must consider employment, inflation and economic growth when it comes to making open market decisions. Inflation hawks say that a narrower focus on price stability would reduce economic uncertainty and the inherent premium built into interest rates. That, in turn, would give capital intensive businesses such as utilities more advantages. Namely, they would be able to borrow at reduced costs and would have a more stable environment to manage their assets.

Opponents of Humphrey-Hawkins reform contend that central bankers must consider unemployment during recessions and reject the notion of inflation-free economic growth. One of the most persuasive defenders of the current Fed role is the former Vice Chairman of the Fed Alan Blinder. He argues that the immediate pains of any recession and potentially high unemployment necessitate an influx of money to keep interest rates low -- a policy that he acknowledges could bring about higher inflation.

Intellectually, the Fed is already geared toward fighting inflation. But any formal policies that would hinder its ability to respond to economic downturns are questionable. The Fed's role is not to insulate investors from the consequences of their decisions. But, it is designed to provide reassurances to the economy at-large.