Since the outbreak of a persistent credit crisis five months ago, the Fed has cut its key rate target by 225 basis points in its effort to comfort investors. So far, it has prevented an all-out meltdown in the financial system, but signs of an economic downturn are everywhere.

Last week, the Labor Department reported the first monthly contraction in the U.S. job market on record in more than four years. Weekly jobless claims have spiked in January. The Institute of Supply Management reported that its index on nonmanufacturing activity dropped unexpectedly in December to 41.9% for the month, indicating a contraction, and monthly retail sales reports were mostly weak.

"People want the Fed to have a silver bullet, but there is no silver bullet," says Len Blum, managing partner with Westwood Capital. "We're going to have to ride out a recession here. Lower rates are helpful, but the problem is that banks aren't lending to anyone except those with the best credit and even the Fed can't make the banks act differently."

Meanwhile, some Fed members appear to be worried about the long-term consequences of the Fed's aggressive rate-cutting strategy.

"The Fed has to be very careful now to add just the right amount of stimulus to the punchbowl without mixing in the potential to juice up inflation,'' Federal Reserve Bank of Dallas President Richard Fisher, who voted against Bernanke's half-point rate cut last week, said at an economics conference in Mexico City on Thursday.

Those comments echoed similar sentiments voiced by Atlanta Fed President Dennis Lockhart and Philadelphia Fed President Charles Plosser earlier this week. In an environment where the Fed faces intense pressure from the investment community to continue printing money and pumping it into the banking system or risk taking the blame for a disastrous panic in the market, their comments seem to reflect concerns that in trying to bail out Wall Street now, the central bank may be hurting the nation's long-term prospects for economic growth in the years ahead.

Gold prices are soaring while the value of the dollar weakens, and the federal government sees its already large budget deficit widening this year. As Bernanke reminded lawmakers in congressional testimony last month, the government's personal consumption expenditure index has been increasing faster than its long-term comfort zone. Still, most market-watchers say inflation is not a big risk for the economy now, and the Fed should continue pouring the punch.

"If growth slows down enough to bring us into a recession, I don't think we should fear inflationary pressures," says Christian Menegatti, lead analyst with RGE Monitor.com, an outfit that predicted the U.S. housing downturn and credit crisis well in advance. "Cutting rates further will be necessary."

Menegatti predicts the Fed will cut its fed funds rate target to 2.5% in the next two meetings and stop there. Beyond that, he says the Fed could risk an outbreak of inflation.

"The Fed has been adding a huge amount of liquidity to the markets in order to fight recession, and I'll bet you that some of that is spilling out into newly granted credit that may fuel the fires of inflation later on," says Richard Sylla, professor of economics with the Leonard N. Stern School of Business. "The Bernanke bet is that he can create more money now to help us through this financial crisis. Then, when that's out of the way, there's a threat of inflation if you do nothing, but the Fed can reduce liquidity as quickly as it adds it. So, once this crisis is over, the Fed is going to take the liquidity away, and rates will go higher."