That's where the Fed finds itself currently, trying to balance its dual mandate of price stability and full employment.

As Randall Forsyth writes in this week's Barron's (subscription required):

Friday's jobs data underscored Wednesday's reiteration by the Federal Reserve that it will keep its key policy rate at 0-0.25% "for an extended period." What was new was that monetary authorities also outlined the conditions that would justify keeping rates at rock bottom: "low rates of resource utilization, subdued inflation trends, and stable inflation expectations." Translated from Fedspeak, "resource utilization" is unemployment; it is now paramount to Bernanke & Co. that the official jobless rate is over the psychologically important 10%.

But the second and third conditions pose a dilemma for policy makers, says Mohamed El-Erian, Pimco's chief executive and co-chief investment officer. While the jobless rate argues for continued low rates, the other two conditions - inflation trends and inflation expectation - are flashing yellow lights. Gold touched $1,100 an ounce last week while the Treasury Inflation Protected Securities market was indicating higher inflation expectations. Then, he adds, there's the question of the Fed's policies feeding asset bubbles, a lesson we should have learned from the past.

"Putting it together, there's no right answer" as to whether the Fed should raise rates or wait, El-Erian says in an interview at Pimco's Newport Beach office. "It's a question of which mistake you're willing to make," which is why he says he doesn't envy policymakers these days.

I don't envy them either. This dilemma helps explain why we've become so nervous about inflation this year. It's a classic "pick your poison" scenario: raise rates to fight emerging inflation and be rewarded with more economic pain plus prolonged/higher unemployment. Or leave them low and risk letting the inflation genie out of the bottle.
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Mark Biller is Sound Mind Investing's Executive Editor. Visit www.soundmindinvesting.com to learn more.