What Will It Take to Get the Fed to Stop Easing?
With no apparent signs that the Federal Reserve's aggressive stimulus is causing harm, the measures likely will continue despite persistent signs of economic recovery.
The debate over monetary policy may be a case, then, over not what Fed Chairman Ben Bernanke worries about most but rather what he is not worried about—mainly whether creating trillions of dollars will cause the runaway inflation that many critics expect to happen.
"Europe has stabilized, the (U.S.) economy is doing better, yet the Fed has this super-accommodative policy in place," said Joe LaVorgna, chief US economist at Deutsche Bank. "It doesn't make sense, but they're stuck with it." (Read More: 'New Normal' May Be Nearing End: Pimco's El-Erian)
Bernanke has said that the Fed will wait until the unemployment rate drops to 6.5 percent and inflation exceeds 2.5 percent before the Fed starts raising interest rates. Unemployment is currently at 7.8 percent and inflation a shade below 2 percent.
When it will stop creating money and buying government debt is another question, with that process likely to end before interest rates rise.
Quantitative easing has sent the Fed balance sheet to nearly $3 trillion and spiked fears that all that money floating around eventually will find its way into the economy and create rampant inflation.
But recent signs of economic improvement—like the steep drop in weekly initial jobless claims and a four-year high in home construction, both reported Thursday—have done little to sway Bernanke.
It has, though, stoked criticism and calls for the Fed to begin letting the economy run on its own.
"I am nonplussed as to why the most senior folks at the Fed seem to be so enamored with more QE," LaVorgna said. "That's probably a function of those folks putting way too much emphasis on what their models of monetary policy show. I don't trust their models. They don't work where relations to variables have gone to places we've never been before."
Yet Bernanke pushes on, with many economists believing that he will keep pressing for easing until the signs become clearer that unemployment has been tamed, even tolerating a higher level of inflation in the process. (Read More: Fed Hawk Voices Doubts Over Benefits of Bond Buying)
"Bernanke wants evidence that it's a sustained, strong recovery, so a blip lower in initial jobless claims, especially in this environment, isn't going to be enough," said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch. "It has to be real clear evidence that there's been a fundamental change in the health of the economy and we're entering a period of sustained job growth, and we're seeing no evidence of that so far."
Instead, what he has focused on are some of the more daunting internal unemployment metrics.
Long-term joblessness remains the primary problem, with the average duration of unemployment at 38 weeks—the lowest since February 2011, but still high. A separate reading that also accounts for the underemployed and those who have quit looking for work also remains elevated at 14.4 percent.
At some point, though, Bernanke will have to weigh the long-term consequences against the near-term benefits. (Read More: Fed's Beige Book: Fiscal Uncertainty Impacting Hiring)
"If the recovery numbers continue to look reasonably better in the Fall, they should look at doing something to pull back QE," said Michael Yoshikami,, CEO at Destination Wealth Management. "It doesn't mean they have to pull everything off the table, it's just not quite as intense as the practices they're engaged in now."
The history of inflation shows that it comes with little warning and policy makers generally have few options. Former Fed Chairman Paul Volcker was forced to take the country into recession in the early 1980s in order to stop the runaway inflation from the 1970s.
With $3 trillion on the Fed balance sheet and $1.8 trillion in the coffers of nonfinancial companies, an inflation torrent anytime soon could be equally difficult to manage.
"It comes without a lot of warning and tends to accelerate, and by the time it's accelerating you've lost the ability to stop inflation," Yoshikami said. "It just really has to run its course."
—By CNBC's Jeff Cox