The Federal Reserve, by a 9-3 vote at this morning's meeting, has reduced the federal funds target by twenty-five basis points. The decision was not in itself remarkable; markets had already priced it. What is worth attention is what the decision says about the Committee's reading of present conditions — and whether the read is correct.

The case for the cut is straightforward. Inflation has moderated meaningfully from the highs of three years ago. The labor market, while not weak, has cooled. Credit conditions for small and mid-sized firms, which the large banks tend to under-report, have tightened more than the aggregate measures suggest. A cut, at the margin, eases the cost of borrowing for the firms that need it most and arrives early enough to matter.

The case against is also straightforward. A central bank that cuts before inflation is settled may discover, with embarrassment, that the moderation was less complete than the data suggested. Anchored expectations are the central bank's main asset, and they are anchored less by today's decision than by the credibility of the decision-maker. A premature cut, followed by a forced hike, is the loudest possible declaration of having been wrong about the inflation problem.

My view, for whatever it is worth, is that the Committee chose correctly, narrowly. The forward indicators — manufacturing new orders, small-business credit availability, commercial real estate financing — have all weakened in a way the aggregate price index does not yet capture. Acting on those leading indicators is what a forward-looking central bank does. But the dissents are not foolish, and the Committee should attend to them.

What I would caution against is the temptation, after a cut, to declare the matter settled. The central bank's job in the next twelve months is not to engineer a particular path for short rates; it is to maintain the conviction, in the citizenry and in the bond market, that it can be trusted to do whatever is necessary in either direction. Today's cut, modest and explained, contributes to that conviction. A sequence of cuts driven by political pressure would undo it.

Twenty-five basis points is a small number with a large signal. The signal, today, is that the central bank is reading the situation and leading rather than following. Continue thus.