Let us first look at that verse:
"But the one who does not work, but believes in Him who justifies the ungodly, his faith is reckoned as righteousness..." (NAS)
Now, if we read only that verse, the Catholic would have no response and if he had any integrity, would be forced to consider "Sola Fide." However, if he has true integrity, the Catholic doesn't stop at one verse taken out of context - he reads on! What, exactly, is being spoken of in this verse? Justification (being made righteous) and ultimately salvation through this righteousness is the context.
So, we read on and find that this chapter relates the righteousness of Abraham and how he was justified through his faith, but how was this justification revealed? Through his works! Abraham demonstrates his faith through his willingness to sacrifice his only son and continues to show his faith through circumcision - which becomes the sign of faith for the whole Jewish religion.
So, does Romans 4:5 point us to Sola Fide? Only if it is read in a vacuum.
The context of Romans 4 shows us that it is through Abraham's faith that he
is justified, but that justification is shown through his works. This leads
us to another reference of Abraham and what justified him, James 2:14 ff:
"What use is it, my brethren, if a man says he has faith, but he has no works? Can that faith save him? ...Even so faith, if it has no works, is dead, being by itself. ... But are you willing to recognize, you foolish fellow, that faith without works is useless? Was not Abraham our father justified by works, when he offered up Isaac his son on the altar? You see that faith was working with his works, and as a result of the works, faith was perfected. ...You see, a man is justified by works and not by faith alone. ...For just as the body without the spirit is dead, so also faith without works is dead." (NAS) [Before I am attacked for the ellipses, nothing of the context is lost through their use. The entire context is presented below.]
So, what is the Catholic response? We do not deny that justification is through Faith, we just deny that it is a faith that is alone. Sola Fide is a denial of James 2:14-26, so the only way to accept Sola Fide is to remove the book of James from the Bible (as Martin Luther attempted to do).
Later in IRC this conversation took place:
(NA27 is James White, aka Ortho; CathApol is Scott Windsor; and |Ref|, I don't know his real name).
[NA27] Well, better deal with what 4:4 says, Scott.
[CathApol] before I leave here, I will upload to that site what I have...
[CathApol]it may not be finished, if not, I will indicate as such
[NA27] You can't even start on 4:5 without understanding 4:4.
[ |Ref| ] ortho, i was betting hed take the akin 'ergon nomou' approach
[ |Ref| ] sad as it is
[NA27] Well, 4:4 precludes that.
[ |Ref| ] i know
[ |Ref| ] i told scott already
OK, well as I told |Ref|, I was not using the 'ergon nomou' (works of the law) approach. |Ref| was quick to ask (even though I wasn't going that route) "Which of the Mosaic Laws was Abraham following?" The "catch" here is that Abraham came before Moses, so there could be no Mosaic Law at the time! Still, even if one did go that route, one could argue that the Laws of God are written in man's heart. Again, that was a tangent that I was not pursuing. I would also add to James that 4:4 does not preclude ergon nomou! IF the works that are described in 4:4 are works of the Law, then to "one who works" there is no merit. However, if these works be done in the state of grace, then they will reckon to him a favor!
To deal with Romans 4:4 - let's begin with the quote:
"Now to one who works, his wage is not reckoned as a favor, but what is due."
This whole section is still dealing with Abraham, and it states essentially that that Abraham was not justified by works, for if so, "he would have something to boast about, but not before God." How do we know Abraham was justified? It was evidenced through his works. So again, we cannot read Roman in a vacuum - James is part of this Canon of Scripture too, so if we accept all of Scripture then we cannot accept Sola Fide (Faith Alone) but must understand that Faith and Works go together, one without the other is useless.
Another aspect of Romans 4 regarding "works" is that Paul is stressing that if a man "works" for a "wage" then he will be paid what he is owed, and no more. It is impossible for a man to "work" enough to earn his salvation, and this is what Paul is stressing. Paul is not against works here, per se, but rather he is against the thinking that one can "earn" their way to heaven so that salvation becomes a "debt" that God is obligated to "pay." Salvation is a free gift from God, but this does not negate the necessity and merit of works done in the state of grace. (reference: Not By Faith Alone, Robert Sungenis, 362)
Entire context of James 2:14-26:
"What use is it, my brethren, if a man says he has faith, but he has no works? Can that faith save him? If a brother or sister is without clothing and in need of daily food, and one of you says to them, 'Go in peace, be warm and be filled,' and yet you do not give them what is necessary for their body, what use is that? Even so faith, if it has no works, is dead, being by itself. But someone may well say, 'You have faith, and I have works, show me your faith with the works and I will show you my faith by my works. You believe that God is one. You do well, but the demons also believe, and shudder. But are you willing to recognize, you foolish fellow, that faith without works is useless? Was not Abraham our father justified by works, when he offered up Isaac his son on the altar? You see that faith was working with his works, and as a result of the works, faith was perfected; and the scripture was fulfilled which says, 'And Abraham believed God, and it was reckoned to him as righteousness, and he was called the friend of God. You see, a man is justified by works and not by faith alone. And in the same way was not Rahab the harlot also justified by works when she received the messengers and sent them out by another way? For just as the body without the spirit is dead, so also faith without works is dead."