Sewell Chan on today's Fed meeting.

Not since 2003 has the prospect of deflation been taken so seriously at the Fed, and not since the 2008 financial crisis have the markets been looking so closely to it for guidance. With Congress unwilling to embark on substantial new stimulus spending, the Fed has the only tools likely to be employed anytime soon in response to the economic warning signs.

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Mr. Greenspan said there had been "some evidence of a pickup in inflation" until the Greek debt crisis took hold in the spring. But the resulting uncertainty drove down long-term interest rates -- the yield on the benchmark 10-year Treasury note fell to 2.82 percent on Friday, the lowest level since April 2009, and barely budged Monday -- in a reflection of what Mr. Greenspan called continuing problems in the financial markets.

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Mr. Kroszner said it seemed increasingly likely that the Fed could announce that it would reinvest the cash it receives [purchase?] as the mortgage bonds it holds mature, rather than letting its balance sheet gradually shrink over time.

In March, the Fed completed its purchase [reinvestment?] of $1.25 trillion in mortgage-backed securities. A decision to reinvest the bond proceeds in other mortgage-related securities [purchase?], or in Treasuries, would be largely symbolic but carry great weight, as it would signal concern about the economy, and also make clear that an "exit strategy" from easy monetary policy was not imminent.

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But [Laurence H.] Meyer, the former Fed govenor, said the committee should take into account not just the probability of various outcomes, but the potential damage associated with each of them.

"Because the cost of a slowdown in growth is so dramatic relative to that of higher inflation, they should follow the risk-management strategy that Greenspan espoused during the last deflation scare," he said.

During that period, in 2002-3, the Fed kept interest rates low, as the economy recovered from the 2001 recession, to guard against deflation. Those fears did not come to pass. But some now say the Fed kept rates too low for too long, feeding the housing bubble.

"It is by no means a slam dunk," Mr. Meyer said of the Fed’s decision.

And perhaps the Fed had to keep interest rates low in 2002-2003 b/c Bush's tax cuts were not a very effective form of stimulus? And perhaps the bubblicious tax cuts to the speculative rich combined with low interest rates to bequeath us a monster housing bubble?