“If markets are a matter of expectations versus reality, then the Federal Reserve learned yesterday that letting expectations get out of hand can be costly,” writes Floyd Norris in today’s New York Times.

“The Fed had spread the idea that it was sure to ease credit again yesterday, and it did. But many had concluded that the cut was going to be bigger than it was, and a result was falling stock and bond prices.”

” ‘People will conclude this is probably it,’ Jim Glassman, a senior economist at J. P. Morgan Chase, said. He said he thought only weak economic numbers would now lead to a further lowering of the federal funds rate, which the Fed cut to 1 percent from 1.25 percent. Mr. Glassman had hoped and expected the cut would be to 0.75 percent.”

“In the long run, however, the most important part of what the Fed did yesterday was its attempt — a somewhat clumsy one, as it turned out — to again indicate that it would be a long, long time before the Fed considered raising rates. And even with yesterday’s retreat in the bond market, rates remain at extraordinarily low levels.”

“The Fed’s attempt at reassurance was made in the third paragraph of its statement.”

” ‘The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation from its already low level. On balance, the committee believes that the latter concern is likely to predominate for the foreseeable future.’ ”

“The Fed is often Delphic in its pronouncements. But this one was not meant to be that way. Read literally, however, the word ‘latter’ would appear to refer to the last risk mentioned, that ‘of a pickup in inflation from its already low level.’ If the Fed was warning that worries about inflation could dominate future action, then that could be read as a warning of a possible rate increase in the future.”

“That is not, however, what the Fed meant. A Fed official, speaking on the condition of anonymity, said that ‘latter’ was supposed to refer to the entire second sentence of that paragraph, not to the last risk mentioned. That is the way that most if not all Fed watchers read it, even if in terms of syntax, it was not the correct interpretation.”