The Federal Reserve signaled Tuesday afternoon that it wasn’t quite willing to give in to Wall Street’s expectations of a 100 basis-point cut in the federal funds rate, instead cutting the target rate by 75 basis points to 2.25 percent. Restraint by Bernanke & Co. notwithstanding, the cut moves the Fed’s key rate to its lowest level since 2004.

Surprisingly, stocks eventually moved higher on the news, after initially paring the day’s earlier gains; the Dow Jones Industrial Average was up 2.71 percent to nearly 12,300 when this story was published.

Bond yields, including the benchmark 10-year Treasury, also rose; the 10-year Treasury yield was at 3.46 percent in late afternoon trading, up from 3.30 percent earlier on Monday.

“Recent information indicates that the outlook for economic activity has weakened further,” the Fed’s Board of Governors said in a statement, after meeting today in Washington. “Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.”

The rate cut passed on a 8-2 vote, with Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser dissenting amid a desire for “less aggressive action,” the Fed said.

The FOMC did note that inflation “has been elevated,” which likely kept the Fed from cutting key rates even further.

Via Bloomberg, a suggestion that inflation may be moving closer to the center stage of monetary policy:

“Relative to where inflation is running is where you begin to get the real tension between addressing the liquidity problems in the banks and the capital markets, and trying to encourage inflation to be under control for the long run,” former Fed governor Susan Bies said in an interview with Bloomberg Television. “They are running very close, in this very high inflation environment, to how much they can deal with.”