Facing increasingly frantic calls for lower rates, but fearful of forecasting inflation and a potentially inflationary and universally unpopular slide in the U.S. dollar, the Fed's Open Market Committee (FOMC) today kept its key Fed funds rate on hold at 5.25 percent.

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This was in keeping with today's Wall Street mantra of "Do no damage."

By keeping rates on hold, we believe the Fed is taking a timid approach and that a timid Fed spells confusion and trouble for the future.

We all know that inflation has been above the Fed's comfort zone of 1 percent to 2 percent for months and has shown little sign of falling since the Fed stopped raising rates.

We are disappointed because we believe the Fed is ignoring the increasing evidence that stagflation now haunts the U.S. economy.

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Stagflation is when an economy experiences both economic stagnation and inflation at the same time. It is the very worst of economic viruses. It causes volatility and uncertainty. Translation? Financial pain for many.

The problem is that the high interest rates necessary to kill inflation serve to deepen any economic recession or stagnation.

A cut in interest rates will serve to fuel inflation, which over the longer term is also damaging to growth.

There is increasing evidence that both recession and inflation are stalking the U.S. economy, putting the Fed in a most difficult position.

On reading the Fed announcements, listening to the Fed chairman's recent public comments and to the statements of some of his fellow FOMC members, we feel that the Fed is concerned about increasing inflation.

We believe that the correct medicine was to raise rates.

However, the Fed was then faced by the residential housing bust and the subprime mortgage problem.

We feel that the Fed hesitated in its determination to contain inflation and that its hesitation will prove costly. Today's continued hesitation to raise rates will, we believe, prove very costly to the American economy, in the longer term.

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What is worse is that the Fed will increasingly be perceived as timid. Combating stagflation requires a strong leader that is clear. Even then, the fight and speculation over a reversal from sustained higher interest rates leads to volatility and uncertainty. A timid Fed will serve only to create confusion and increase the coming uncertainty and volatility.

Today's decision by the Fed to keep rates on hold will please many, particularly the holders of long bonds and equities. However, it will be to the detriment of everyone in the longer term.

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