The Big Easy : When in doubt cut rate!!

We're referring not to New Orleans but to the Federal Reserve, which yesterday continued its habit of cutting interest rates into inflation-tempting territory. The statement by the Open Market Committee signaled some ambiguity about future rate cuts, without referring specifically to a "pause," but the problem is that when in doubt the current Fed always seems to err on the side of easier money.

Yesterday's 25-point cut in the fed funds rate means that Chairman Ben Bernanke and seven of his mates have now voted to take short-term rates to 2%, from 5.25%, in only eight months. Two committee members, Richard Fisher of the Dallas Fed and Charles Plosser of Philadelphia, dissented for a second time in a row. If this experiment in radical rate-cutting turns out badly, maybe the next President will appoint one of the dissenters as chairman.

The Fed's decision came despite yesterday's news that the economy wasn't in recession in the first quarter, after all. Growth was certainly anemic, at 0.6%, and final sales fell by 0.2%. Yet the economy's underlying resilience is remarkable given all of the bad news in housing, the credit markets and Washington. Excluding housing, GDP after inflation increased by 1.8% in the quarter and is up by 3.6% from a year ago. Joseph Stiglitz and other economists of doom will have to keep hoping for that cataclysm they've been predicting.

It is possible we've dipped into negative growth in the second quarter, no thanks to the Fed. While its big easy policy may be stimulating after a lag, its main short-term result has been to send dollar-denominated commodity prices soaring. Oil alone is up nearly 70% since late August, despite a slowing global economy. Oil fell slightly and the dollar strengthened yesterday from its historic lows on the mere hint of a possible pause in rate-cutting. But the Fed missed an opportunity to take much more air out of the commodity price bubble.

The Fed's statement at least bowed to this reality, noting that "energy and other commodity prices have increased." But in the same breath the Fed noted that "readings on core inflation" – without food and energy – "have improved somewhat" and that it "expects inflation to moderate in coming quarters." That's also what the Fed said a year ago.

While they're waiting for this looming moderation, American consumers will have the privilege of paying $4 a gallon for gas and $2.20 for a dozen eggs (versus $1.63 a year ago). This price spike across nearly all commodities has socked American pocketbooks just when greater consumer spending is supposed to reignite the recovery. The federal tax-rebate checks are beginning to arrive in the mail, and much of the cash will go to fill up the family SUV. If Republicans want to know why consumer confidence is down, and why voters are aching for "change," this is a big part of the reason.

Even the Bernanke Fed seems to appreciate that its current rate-cutting spree can't last forever. The price is likely to be paid next year, if inflation doesn't "moderate" and the Fed has no choice but to start rapidly tightening money to prevent a major price breakout. We think investors and consumers alike would have responded better yesterday to a Fed that declared an end to its easy-money ways and vowed to restore price stability. Maybe next meeting.