He is a merciful and gracious Lord. These two are often found joined together in the psalms, as is Ps. 86:15; 103:8, and in this one and the next one, Ps. 112:4. Lyra offers this explanation: “Merciful” (misericors) deals with the inner attitude, “gracious” (miserator) with the outward result. But I do not like this, since also “merciful” is not spoken of except because of its result.
First, they can be distinguished thus: “Merciful” because of justifying grace, “gracious” because of guilt forgiven. Although our smart disputers define these two as being identical, Scripture nevertheless distinguishes them, as in Rom. 4:25: “He died for our sins and rose again for our justification.” Second and better: “Merciful” because of the grace by which He removes every misery of the soul because of sins, and “gracious” because of the punishment of sin, namely, the most unfortunate evil of the conscience, against the twofold evil, namely, of guilt and of punishment.
Third and best: “Merciful” because of the salvation of the whole soul and the blessings of His mercy upon the soul, but “gracious” in that He turns even the external ills of the body into good for the soul, as has been said. First they harmed the soul and increased sin in the soul, but now they not only do not harm the soul to which He has become merciful through grace but are very much to its advantage. Therefore these are the wonderful works of Him who has pity, who only fills us with good things, so that not only the good things are good and well for us, but even whatever evils there are [so that thus nothing is in vain for the saints, but all things work together for good (Rom. 8:28). Thus Jesus Christ is grace and peace]. Fourth: because it is said in Rev. 3:17: “You do not know that you are wretched and miserable,” it seems that he is wretched because he does not have mercy himself, and miserable because he cannot have mercy on others either, but is only miserable. But the Lord is neither wretched nor miserable, indeed, pitying the wretched and making the miserable one able to have mercy on others, so that He is not only rich toward His own, but also abounding, causing them also to make others rich.
Luther’s works, vol. 11: First Lectures 2