Reflate the housing market
Burford believes that the Fed wants to heal the housing market. The home building and mortgage lending industries are in recession, and many observers worry that they'll drag down the entire economy with them.

"That's where this mortgage situation comes in," Burford says. "To maintain that, they (the Fed) are in the process of reflating housing. They've got to get inflation back in the housing business. They can't come out and say that, but that's what they want. The way to do that is, essentially, to put a lot of money in the system."

Marc Schwaber, president of Preferred Empire Mortgage in Melville, N.Y., agrees that housing threatens to weaken the economy. Lowering the federal funds rate, and therefore the prime rate, will help, Schwaber says. But lower rates are insufficient.

What's needed is a higher limit for conforming mortgages and Federal Housing Administration-insured home loans, Schwaber says. Those actions would stimulate homebuying and boost the overall economy, he says.

How the Fed controls the system
Banks charge the federal funds rate to one another for overnight loans. The Fed controls the federal funds rate indirectly, by selling and buying securities to add and subtract cash from the banking system. The prime rate is 3 percentage points higher than the federal funds rate.

Sometimes banks borrow directly from the Federal Reserve. They pay the discount rate on those loans. For years, there has been a stigma attached to borrowing via the discount window. The Fed has been trying to eliminate the disgrace, but it hasn't been erased yet. That limits the effectiveness of cutting the discount rate.

The Open Market Committee meets eight times a year, roughly every six weeks. The next meeting is scheduled for Jan. 29 and 30, with the rate policy announcement coming on the latter day.