And you thought low prices were a good thing.

What's tricky is balancing the risk of inflation vs. deflation, since monetary policy moves aimed at staving off inflation-such as lowering interest rates-can cause deflation, and vice versa. Overestimate your risk of either, and you could cause, or at the least exacerbate, the opposing problem. Rate cuts, a common Fed tool for managing inflation, are a double-edged sword. Normally, financial players like low interest rates, because they can borrow money cheaply and reinvest it elsewhere to make a profit. If the interest rate flirts with numbers approaching zero for too long, institutional investors may not play along. The problem with an interest rate at or near zero is that there's no money to be made by lending. As a result, lenders just sit on their cash rather than risk losing money if the rate of inflation surpasses the meager interest rate, or if the debtor defaults. This resulting stalemate, aka "liquidity trap," is a concept that makes investors and policymakers alike very nervous.

The overarching fear is of something called a "deflationary spiral," a nasty feedback loop of decreased demand spurring companies to drop their prices, which hurts profits and precipitates layoffs. This, in turn, contracts the amount of money in consumers' pockets, which further dampens demand, starting the cycle over again. This is why economists are sounding the alarm about the spreading chill of the credit crunch from banks to average citizens. Without consumer credit, the spending engine that powers a substantial part of our economy can't function.

So, are we headed down the rabbit hole? The short answer is: Probably not. While most economists think a recession is inevitable, they're still hopeful that its depth and duration can be mitigated by smart intervention. Fed policymakers have studied both the Great Depression and Japan's "lost decade" of the '90s, the two most serious periods of deflation in the 20^th century. In both past cases, the respective governments were tentative and slow in their responses. During the Depression, the Federal Reserve allowed banks to collapse after the stock market crash created an army of investors and average citizens clamoring for their money, eroding confidence and shrinking the money supply. In Japan, after several years of a recession exacerbated by the high cost of borrowing, the central bank overcorrected by lowering interest rates too far, pushing the already beleaguered economy into deflation.

Policymakers today have certainly learned from these missteps. In recent weeks, the Fed pumped huge amounts of money into the economy by issuing loans to banks and buying commercial paper, and they're keeping the benchmark rate above-although just barely-the point of no return. Whether these lessons from history will hold up to a messy, multinational global crisis remains to be seen, but it's clear that today, despite coming under fire for what some economists call a piecemeal approach to the crisis, the Fed is betting that the consequences of inaction will be greater than any missteps made in its course of action.

Explainer thanks Richard C.K. Burdekin of Claremont McKenna College, Simon Johnson of the Massachusetts Institute of Technology, and Richard Katz of "The Oriental Economist Alert."