The Wall Street Journal-20080131-Nascar Bernanke

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Nascar Bernanke

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Now we know what happens when Wall Street and the political class criticize Ben Bernanke for being "behind the curve." He gets in his race car and accelerates right through the curve. With yesterday's 50 basis point interest rate cut, following last week's 75 point emergency reduction, we are certainly off to the monetary races.

Readers of these columns know we prefer more careful driving by the Fed, and judging from yesterday so do the markets. The long bond fell more than a percentage point, while every other economic indicator that signals a weaker dollar and higher inflation also rose. Gold hit $942 an ounce, and the dollar fell ever closer to 1.5 euros. But the most intriguing reaction came in equities, which typically cheer a Fed rate cut, but this time sold off on the Fed news.

Perhaps they were reacting to the Fed's statement that accompanied the rate cut, which suggested the central bankers stood ready to ease even further if events require. Or perhaps they noticed the jolting inflation numbers in yesterday's fourth-quarter GDP report, which had the core price deflator (not counting food or energy) rising by 2.7%, which is well above the 1% to 2% level that the Fed says is (or at least was) its comfort zone.

No worries, added the Fed statement, because, "The Committee expects inflation to moderate in coming quarters." We hope it's not impolite to point out that this is precisely what the Fed was saying a year ago. Perhaps we need to recheck the definition of "moderate."

The Fed is trying to forestall a recession, and what it fears would be the cascading impact of job losses on top of the credit crunch on top of the housing crash. And we'll admit Mr. Bernanke is in a fix, partly of the Fed's own making. Yesterday's report of 0.6% fourth quarter growth was disappointing, though some of the decline was attributable to inventory drawdowns that could be made up this year. In other words, a recession is far from a sure bet.

Mr. Bernanke's calculation seems to be that by easing now he can help the financial system ride out the current storm, and then the Fed can pull back on the throttle later this year if growth re-accelerates -- with no harm done. We hope he knows what he's doing, but our advice is that everyone bring a crash helmet in case he misses a turn.