Stock market investors thought the Federal Reserve Board quarter of a percentage point cut in the overnight interest rate on Tuesday was too stingy. They briefly regained heart on Wednesday on news that the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank were taking measures “designed to address elevated pressures in short-term funding markets." But by Thursday morning, European indices were down by 1% or more. That negative response looks appropriate.

The problem for stocks is that while liquidity matters, interest rates matter more. And the Fed’s statement on Tuesday wasn’t encouraging for investors looking for a near-endless series of cuts. Sure, there was the “slowing…softening…deterioration in financial market conditions," but there was also concern about the “upward pressure on inflation."

Recent readings certainly provide reasons for concern. The rate of US consumer price inflation in October was a high 3.5%, and inflation could soon be higher. As high oil prices and a low dollar work their way into retail prices, inflationary pressure could increase. US import prices leaped by 2.7% in November, to a worst-ever annual rate of 11.4%. Even the so-called ‘core’ inflation indices—ignoring fuel and food—are already close to 2%, the level identified as the upper bound of acceptable by Ben Bernanke, the Fed chairman.

Too great a readiness to cut interest rates would also risk provoking further dollar depreciation. That would exacerbate import price inflation and risk driving foreign investors from US assets, which would force long-term interest rates up. In short, slashing the overnight interest rate too fast might leave the US with high inflation, a falling currency and still worse financing problems. Better to focus on liquidity.

For the US economy needs to be rebalanced. The trade deficit must fall. It won’t unless consumers are less flush. Wall Street must clean up its originate-and-distribute debt stable. It won’t if money comes cheap again. After so many years of excess, some pain—in the real economy and the financial one—is salutary. Bernanke may be ready to face it. Equities, which are still perched on four-year-high slopes despite talk of recession, might not.