A lot of economics has been rolling around in my head for the last two days, mainly from the need to survive a Friday Macro test. So it was with a great deal of surprise one recent morning, while finishing my coffee and suppressing the budding bronchitis that had been brought on by two weeks of brutal MBA finals, that I read that the Federal Reserve is considering in engaging in another round of Quantitative Easing (see: Jim Saft, “QE2 Will Be Far From a Booze Cruise.”)

Not my image, so I've linked to the online source! Click for a discussion on deflation.

I don’t know, it sounds like the Fed is getting a bit tipsy: Isn’t $1.7 Trillion of added liquidity enough already, along with keeping the Fed Funds rate near zero for over a year? While we can all say “huzzah!” for the US’ aggressive monetary and fiscal policy reaction in light of the recession, and this is likely a key reason why the US economy recovered far better than in Europe, it seems like a second round of Quantitative Easing risks pushing the dollar toward runaway inflation the likes of which the nation hasn’t seen since the 70s. This is particularly true since economic policies take a while to come into effect; in other words, we don’t know right now how bad things really are in America, and if they’re getting better adding more liquidity on top of already record-setting liquidity means we’re going to have one fast, aggressive upswing with higher prices for both consumers and businesses.

I realize the American economy right now is not pretty, and a far cry from the economic miracle that we experienced in the early 2000s. Buckle up: It’s not headed back to those glory days anytime soon. Things might be getting better, it’s just that the way back from this recession is through modest economic growth, not boom times. Not only did the recession officially end over 16 months ago, existing home sales have shot up more than four percent two months in a row. A Constant Contact survey amongst small US Businesses in April revealed more than 70 percent were predicting growth this year. Now for the bad part, and what’s keeping the economy in the headlines and Barack Obama in trouble at the polls: Only 40% of those businesses planned to hire.

Such is business. With workers the most expensive line-item, most companies will continue to wait until things stabilize more clearly before hiring. If firms can protect their modestly-growing profits and experience some growth by struggling with operational issues resulting from short staff, that’s what’s going to happen until the recovery is stronger. It’s hard to know to what extent that’s happening now, since the signs pointing toward a recovery are there but remain fairly unattractive. This is not a sexy recovery.

So shouldn’t the Fed grease the wheels a little bit more so the nation can get back to having good times? No.  Providing the US with a boom economy isn’t the Fed’s job; that’s the role of the free market. The Fed’s job is to provide the right monetary environment for economic growth while balancing that against inflation. It’s the latter part that the Fed might need to focus on right now, because again, if we wait until all signs are that we’re in an inflationary period, it’s probably already too late for the Fed to pull the already-existing vast amounts of liquidity out of the system.

It’s painful right now in America, and people are still without jobs. The last thing needed on top of that is is another boom–followed by the inevitable crash–that’s artificially generated by all the liquidity in the US economy or worse, runaway inflation that raises prices for everyone and that hampers real growth. Yes, this party sucks. No, the economy’s recovery is no fun. The way back from this crisis, however, is through a long, slow climb to a moderate recovery. This is an unpopular truth, possibly even unAmerican; we tend to want it all and want it now. But we’re going to have to wait. The Fed’s job is to hit the brakes when times are good, and unfortunately, that time might actually be coming early in light of the record-setting actions the Fed had to take post-2008. If this stings, consider that it could be worse, both for America now and in the future.