The poor business environment is driving down wages and costs, but inflation looms because of the government’s record deficit. Record low interest rates are not having the desired effect because the recession is more due to political policies than economic. Business owners are not hiring and growing despite low interest rates because pending legislation such as the Union Card Check bill, Cap and Trade, healthcare reform substantially raises their risk of and costs.
Low interest rates weaken the dollar causing industrial commodity prices to rise. If the Fed raises interest rates, especially in the midst of a record high unemployment, they risk driving business into a double dip recession. If they keep interest rates too low for too long they risk creation of another bubble.
The Fed is betting that they can time the change in interest rates and the money supply so precisely that can avoid another recession and inflation. They have failed at this before with less uncertainty and extremes in the market.
The Fed may need magicians rather than economists to succeed this time.