Behind Cheaper Credit, Inflation Fears Loom

"The Fed has abandoned the one thing it can truly control -- the long-run increase in price levels -- in a self-defeating attempt to keep the economy growing," he wrote. "Creating more dollar bills will not add to the nation's wealth, or make workers more productive."

Other economists said the Fed had to cut rates to steady the financial system.

N. Gregory Mankiw, a Harvard economics professor and author of a popular economics textbook, said: "We don't have good textbook answers for how you deal with a collapsing investment bank. Dealing with Bear Stearns going from $100 a share to $2 . . . is not something we have good off-the-shelf answers for."

Other analysts said the Fed cut rates to head off foreclosures on adjustable-rate mortgages. Many homeowners signed mortgages with very low introductory rates that will reset to market rates this year and next, forcing homeowners to make sharply higher monthly payments.

"The Fed is obviously bending over backward to help minimize payment shock for buyers whose mortgages would have reset to substantially higher rates," said a former mortgage trader for one of the major investment banks.

But whether the Fed action will actually lower mortgage rates isn't a sure thing. So far they haven't fallen as sharply as Fed rates. According to Mortgage Information Services, 30-year fixed-rate mortgages were 6.34 percent on average last September when the Fed began to cut its rates. The 30-year fixed-rate mortgage stayed flat for a few weeks, dropped to 5.48 percent in late January, then climbed again to 6.13 percent last week.

Some analysts worried that this could be a symptom of what is often called "pushing on a string," a phrase that describes the lack of impact the Fed sometimes has on consumer rates when financial institutions remain cautious about loans.

But Mankiw said the Fed still has plenty of tools to boost the economy and room to cut rates. "I don't think we're in a position where monetary policy is not effective," he said.