The Fed Can Put Out These Fires

The Federal Reserve keeps plugging leaks in the dike, and investors keep worrying when the next one will pop. The Fed has filled the holes with $400 billion in various lending programs. Now comes a $30 billion loan, backed by securities of questionable value, to help JPMorgan Chase (JPM) lay Bear Stearns (BSC) to rest, along with a new overnight borrowing facility for key securities dealers—this one with no dollar limit. The capper: another big three-quarter-point cut in the Fed's target rate on Mar. 18, to 2.25%, making policy as stimulative now as it was after the 2001 recession. Constructive? Absolutely. But at what cost to the Fed's inflation-fighting credibility, so crucial to low market rates and a healthy dollar?

There is unease even within the Fed, given the two dissenting votes against the size of the latest rate cut. Investors appear to be treating gold and other commodities as hedges against future inflation. Some measures of inflation expectations, based on Treasury Inflation-Protected Securities, have picked up. The dollar has sunk to new lows vs. the euro and the yen, pushing up import prices. Producer prices in February rose a greater-than-expected 0.5% outside of energy and food. A few outspoken commentators are even saying the Fed should be raising rates.