Monetary policy — as well as fiscal policy — is faced with the additional problem of a fundamental imbalance between production and consumption in the US. The US consumes too much to the tune of 5-6% of GDP, relying on foreign production to deliver the excess.As Brad DeLong and others have long said, our current account imbalance and the huge buildup of dollar-denominated bonds in the hands of the Bank of China can't go on forever. The only question, really, is whether we manage to unwind this with a moderate amount of pain or a huge amount of pain. The jury is still out on that.
[Driving down the Dollar helps fix this imbalance. But this produces inflation, and unfortunately, domestic structural adjustments will probably provoke policy changes that make the inflation even worse.]
The inflation, of course, serves a purpose — it is a market response to excessive consumption. Policymakers who want to pretend that the fundamental economic problem is insufficient demand rather than excessive demand will find the market yields a solution — higher inflation to depress consumption via declining real incomes and wealth. Not a pretty solution, but a solution. Perhaps we are well past any other solution.