'Helicopter Ben' Touches Down

The Bernanke Fed's dramatic rate cut doesn't mean it has stopped watching inflation.

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Well, it looks as if "Helicopter Ben" Bernanke might just deserve that snarky nickname after all. The Federal Reserve chairman (as well as the Fed's Open Market Policy Committee, natch) certainly flew to Wall Street's rescue today–at least if you go by the stock market's superbullish reaction–with a half-percentage-point cut in the federal funds rate to 4.75 percent and a half-point cut in the discount rate to 5.25 percent.

Economist Michael Darda of MKM Partners sums it up nicely: "The [rate cut] was aggressive and swift and leaves no doubt that the Fed is willing to risk higher inflation in order to lean against house price deflation and the potential ramifications that spring from it. We don't think it was an accident that gold and crude oil rose to cycle highs, the dollar fell, and the yield curve steepened dramatically on the Fed's move."

Indeed, the Fed's policy statement made it clear that the central bank still thinks there's an inflation risk out there, despite the move: "Readings on core inflation have improved modestly this year. However, the committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully."

To economist Robert Brusca, that statement implies that "the Fed did not do this because inflation was tempered but despite the fact that it was not.... The Fed simply decided that, even with the inflation risk, it needed to act on behalf of growth. The Fed is still wary of inflation." And if you go by the upward move in gold and the drop in the dollar, plenty of traders are wary of the Fed. But the stock-owning part of Wall Street sees it a different way. Brian Bethune of Global Insight, an economics consulting firm, thinks the Fed made the right call.

The bottom line is that bold action was needed to deal with the rapid evolution of events in the past several weeks in the economy and the financial markets, and bold action is what the Fed delivered. The FOMC has also left the door open for further rate action before the end of the year, and we believe that the Fed will move to reduce the federal funds rate by an additional 25 basis points on October 31. That will take the federal funds rate down to 4.50 percent.

My take: This move was an insurance policy that could have been a one-time shot. The Fed most likely remains "data dependent" and will closely examine the numbers before making another move. What's more, the Fed could reverse itself and raise rates after the credit crunch and housing crisis ease.