The Federal Reserve faces a dilemma: The job market remains weak and rapid improvement appears unlikely with the GDP growing at a moderate pace of around 2 percent. With inflation muted, this suggests that the Fed should act to boost the economy. While expansionary monetary policy can have further impact on the economy, it is hard to see a meaningful effect on spending and the job market from actions that result in modest incremental reductions in long-term interest rates.

To create a modest reduction in long-term interest rates, the Fed could issue guidance that it will hold interest rates low through the end of 2014 or some other distant point. Markets already know interest rates will remain low as long as the job market is weak and inflation in check. By the same token, market participants realize that if the economy recovers before the Fed's target date, then monetary policy will start to tighten regardless of past promises. This means interest rate guidance could be helpful in revealing what the Fed is thinking, but only modestly so. Ironically, the Fed's successful efforts to become more transparent have reduced the incremental value for monetary policy of even more transparency.

With long-term interest rates already low, a QE3 that commits $1 trillion to buy long-term Treasury bonds and mortgage-backed securities would have a modest impact on the economy. Yes, further quantitative easing will reduce yields on long-term securities. But it is hard to imagine the housing market suddenly booming if mortgage rates fall 50 more basis points to 3 percent when they are already incredibly low. The housing market is healing slowly, but people need jobs and incomes to buy homes at a more rapid pace.

If Chairman Bernanke wants to make a meaningful impact on the economy, he would have to take radical action such as making a commitment to bring about increased inflation of, say, 5 percent for several years. This would give families and businesses an incentive to spend now, since their money holdings will become less valuable with higher inflation.

But this is a radical step for the Fed and could have seriously undesirable consequences. Investors looking to protect themselves against inflation will pile into commodities, raising the prices of oil and gasoline, food, and metals and minerals. The Fed can certainly create inflation; it just might not like the result of negative feedback on consumer confidence that offsets some of the intended monetary stimulus. Intentionally raising inflation would raise a political debate as well, since it means weakening the dollar by design.

The dilemma for Chairman Bernanke is that the job market is weak but the economy is not in bad enough shape to lead him to take the sort of radical action that might make a difference -- but might also have serious negative feedback.

Still, I expect the Fed to act, even with the clear-eyed recognition that the positive impact will be modest. Chairman Bernanke could set the stage by emphasizing that the Fed is missing on both parts of its mandate: The job market is weak and inflation is low, and explaining that Fed action can have a positive impact on both dimensions.

What he might say less clearly is that the positive impact will be modest.