Long-term interest rates have stabilized safely in the Fed-controlled zone, with 10-year Treasury notes at 2 percent and mortgages at 4 percent. Stocks and other markets hope for a third round of quantitative easing — "QE3" — perhaps as early as next week’s Fed meeting. But that move will likely wait for either weaker global economic data or inflation falling toward deflation, or both.

U.S. data is softening — not anywhere near a new double-dip conversation, but not accelerating to self-sustenance, either. March retail sales did OK, up 0.8 percent, but the housing recovery ballyhooed since winter has been exposed as a promotional feature: New starts fell 5.8 percent in March, new permits rose (but nobody gets a paycheck for one of those), and sales of existing homes fell a seasonally adjusted 2.6 percent from February to March. One theory: Diminished inventories of listings have crimped sales. Uh-huh. "Saudis buy, destroy science for 200 MPG cars!"

Inventories are down, but prices in many markets are firming, and the combination encourages sales. Local is local, but Colorado Front Range listings year over year are down 40 percent and sales are up at least 15 percent.

In an unquantifiable development, beneficial for the moment, some 5.5 million distressed homes sit in formaldehyde, embalmed by new state and federal impediments to foreclosure and sale. This inventory is concentrated in the "sand states" (Arizona, California, Florida and Nevada). Instead of rapidly selling and clearing these markets, it may be a long-term benefit to convert them into National Sacrifice Zones … park rangers, tours, T-shirts, postcards and all.

While we all wait on the Fed, and to see if Club Med peoples will overthrow their ICU physicians, intent on hooking patients to more maintenance machinery while standing on their oxygen hoses, a moment for — BOO! — inflation.

The financial Right and many long-cycle thinkers (people who still don’t understand the 1970s) are certain that the Fed’s "quantitative easing" inevitably will cause inflation, executing the perpetual conspiracy of government to inflate away debt. Meanwhile, the Left says economic recovery would be easy if only the Fed would induce 4 percent or 5 percent inflation.

In simplest terms, a central bank’s job in a too-hot economy is to drive interest rates far enough above inflation to cool it off; and in a too-cold economy, far enough below to warm it up.

The Fed’s normal monetary policy tool is the ultra-short-term federal funds rate. But with the federal funds rate already at 0 percent since 2008, and core inflation at 2 percent, the Fed can’t get "far enough below" to induce recovery.

Standard far-enough models today say that the federal funds rate would have to be somewhere around 6 percent to 8 percent below zero to have the usual effect. Short-rate policy frustrated, the Fed has instead in the last three years pulled long-term rates below inflation: That’s been a partial effect of QE, assisted by the Fed’s commitment to keep the federal funds rate close to zero at least through 2014, and as of last September further assisted by "Operation Twist," letting short-term Treasurys run off its balance sheet and buying long-term ones.

Hence, the 10-year Treasury note at 2 percent, at least 1 percent below CPI, when its yield in an ordinary economy should be 2 percent above. To have that effect, the Fed has had to buy all new long-term Treasurys — some argue more than the new issuance.

The economy depends on a lot more IOUs than Treasurys. Suppose markets saw the Fed allow or induce an inflation run-up. If the Fed continued to buy long Treasurys, those rates could stay under control. However, other long paper — corporates, munis, mortgages — would begin to roar in yield and soon become unsalable at all.

The Fed for the moment has the "yield curve" under control. Partly because of its low-rate assurances and purchases, but every bit as important because it promises to keep inflation in bounds. Both Right and Left are wrong. In the debt-soaked modern world, completely unlike the 1970s, owners of IOUs will defend themselves. By selling. At the first whiff of tolerated inflation, fists will pound on Mr. Sell Button, and rising rates will choke the inflation that would rob IOUs of value. Deflation and default ensue.

Losing control of the yield curve is the ultimate nightmare. That is what has happened to Club Med. One day you can sell only short paper, and later even that only at a discount, no matter what the central bank does. Inflation is neither help nor direct hazard; the hazard is failure to live within means, all else is consequence.

The Fed watches lots of things. However, QE1, QE2 and Twist came in response to the two dips of personal consumption expenditures (PCE) to 1 percent. The drop under way I think is too shallow for the Fed to start QE3, but the danger in Europe (and possibly China) may be grave enough for premature trigger.

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