The Fed's real inflation problem

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Traders in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) watch monitors in the trading pit for news to break on the Federal Reserve's decision on interest rate on September 17, 2015 in Chicago, Illinois.

Why won't the Federal Reserve just zero in on inflation?

There were howls of protest Thursday when the central bank decided not to raise interest rates, with observers saying the Fed is just coming up with new excuses not to hike.

That's because it inserted a new line in its already rather lengthy decision statement, "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term."

The Fed also said it will continue to be "monitoring developments abroad."

"The Fed punts AGAIN on a new set of excuses," said analyst Peter Boockvar, of The Lindsey Group, in a note to clients, citing its additional global growth concerns.

But the central bank in fact was citing new reasons for an old, lingering problem: too-low inflation.

"Two percent is our objective, we want to see inflation go back to 2 percent," said Fed Chair Janet Yellen in her news conference Thursday.

Read More Fed leaves rates unchanged

In fact, just the day before the Fed's decision, the consumer price index came out for August. It showed that prices fell relative to July, and were up a tiny 0.2 percent from 12 months earlier.

That's in part because oil and gasoline prices have collapsed. "Core" prices excluding food and energy are up 1.8 percent year on year. But the Fed, which uses a slightly different inflation reading, has been expecting that rate to move sustainably back to 2 percent for years now.

It has not.

It has not even as the unemployment rate has dropped massively; more broadly, the prime age workforce participation rate has stalled out.

It has not even when the commodity up-cycle was still in full swing.

And that is apparently an uncomfortable topic for the central bank.

It is very difficult to tell the public, after all, that the Fed would like to see a slightly higher inflation rate. The obvious question for most is, "why?" The follow-on question, even for many financial professionals, is, "is it worth it?"

Is it worth waiting for inflation to get back to 2 percent if the stock market meantime is scoring big gains, and if leverage is building up within the financial system?

Many Fed officials themselves would say no, and they aren't eager to preside over another asset-price bubble.

Read MoreFed holds off, markets now betting on hike in 2016

The trouble, and what the Fed's latest decision reveals, is that policymakers are actually quite concerned that the inflation rate is not just too low now, but is possibly heading lower. That is in part because the commodity cycle has collapsed, the prices of everything from oil to steel to copper to natural gas have precipitously dropped, and China's slowing growth suggests they're not coming back anytime soon.

The Fed is at great pains to explain this to the public—but is perhaps doing more harm than good by focusing on the various inputs to inflation instead of the final reading itself.

It's not an easy sell to the public, but it's ultimately a much clearer signal were the Fed simply to communicate that it will not raise interest rates until it seems clear that inflation is heading sustainably back above 2 percent.

That may be met with similar howls of protest, but the discussion and debate will at least be the most candid one.