The Fed has also come up with a formal unemployment rate target to help determine its interest-rate policy. Thus, it has said it will keep interest rates at close to zero for at least as long as the unemployment rate remains above 6.5% and inflation below 2.5%. And the Fed, for now, is not expecting the unemployment rate to fall below this target until 2015.

I am going to do an e-letter updating my work on unemployment next year, hopefully in late January. Basically, I think this new Fed policy is going to be their Vietnam. It is a quagmire that will require everything to go right in order for the Fed to be able to exit their past, present, and future QE without huge problems. 6.5% unemployment by 2015? Everything has to go right. And if things start to go right, the labor participation rate will rise as well – unless we get even more income transfers (such as “food stamps”) and less incentive to work, which itself would be a drag on capital formation and result in higher taxes, etc., which would mean even lower GDP growth and likely recessions … and thus lower employment. Everything has to work, all 12 cylinders firing, in this high-powered money model. I have great fears that everything will not in fact work as the Fed hopes. Which means that if, for any reason (say quickening inflation), there is a need to raise rates before 6.5% unemployment is reached, then a reversal of policy will cause great distress, not because it might not be the right thing to do, but because the Fed will have set up a set of market expectations that it will not be able to control.

These types of no-win situations are not good. And certainly not something you willingly and with full intentionality set up. This will not be a problem in 2013 or even 2014, but it will be over the longer term. Maybe the Fed isn’t worried about the long game, but time passes all too quickly. 2016 will seem like it arrived about a week from today, at least the way I experience time now.

This piece for OMS is from Chris Wood, his latest GREED and fear. Look at least at the graphs on page one. Note the projected balance sheet of the Fed in 2015, as well as US household debt, and remember that the largest part of the debt growth is student loans.