The Federal Reserve's Open Market Committee (FOMC) hasleft the outlook for additional quantitative easing ambiguous. Thesummary from the most recent meeting of Fed policy makers expressesconfidence that inflation will remain contained and concern oversluggish economic growth, unemployment and the threat of “globalfinancial strains.” The FOMC promises, in response, to keepshort-term interest rates low, with the target federal funds ratebetween 0 and 25 basis points into late 2014. It also promises tocontinue through year-end “Operation Twist,” in which it buyslonger-term Treasury bonds, to sell nothing from its now-extensiveportfolio of mortgage-backed securities and even to reinvest anyinterest and principal payments it receives. But on the crucialissue, the one that weighs on Wall Street's collective mind, of athird quantitative easing—QE3 in the Street's jargon—the Fedremains coy and promises only to respond to the flow of economicand financial information as needed.

It is apparent from this lack of commitment that the Fed remainsunsure whether the economy needs another quantitative easing now,or, for that matter, ever. The reasons for this ambiguity,frustrating as it may be for Wall Street's traders, are nonethelessplain in the policy criteria outlined some time ago by Fed ChairmanBen Bernanke. Because inflation seems well contained for the timebeing, Bernanke identified two areas as policy cues: one is thejobs market, as a test of whether the economy is making acceptableprogress, and the other is bank lending, to judge whether pastmonetary easing is reaching the economy. The inconclusive mix ofevidence on these fronts explains the Fed's coy attitude. Howevents in these areas unfold will determine when and, contrary tothe common belief on Wall Street, even if the FOMC will go forwardwith a QE3.

Of course, some have argued that the Fed should simply go ahead,that a quantitative easing now would offer insurance against futurecyclical weakness. This line of reasoning is especially popularamong Wall Streeters, who are hungry for still more liquidity,regardless of the economy's needs. But the Fed has broader concernsand is understandably wary. From a policy maker's point of view,there is as much risk as insurance in such an approach. They knowthat quantitative easing and other monetary stimuli have built up ahuge pool of unused financial liquidity. After all, almost 95% ofbank reserves stand in excess of what banks need to back existingloans and deposits. This pool of idle liquidity carries a hugepotential to create asset bubbles and ultimately, perhaps,accelerating inflation. Policy makers will not lightly add to thatpotential. What is more, many at the Fed ask what good moreliquidity will do when there already is such a huge unusedpool.

At the same time, the jobs picture which theFed chairman cited as one arbiter of policy leaves questions aboutthe need for more Fed action. The labor market is far from strong,but according to Bernanke, the Fed looks not for a fully healedmarket, which policy makers know may be years away, but forsubstantive progress. On that score, the crucial matter is jobsgrowth and, to a lesser extent, any increase in hours worked. Thehours would tell the Fed to wait on further stimulus. Average hourshave risen from 33 a week in 2009 to more than 34.5 most recently.The data on jobs growth are less clear. The July report thatpayrolls expanded by more than 160,000 cuts two ways. As anacceleration from the extremely disappointing growth over theprevious three months, it militates against a rush to ease further.The still historically slow pace of expansion—inadequate, in fact,even to keep up with the growth of the labor force—puts the Fed onnotice that the battle to secure an economic recovery is far fromwon.

The pattern of bank lending argues more strongly against theneed for more easing. To be sure, banks are going cautiously. Theystill resist lending in real estate, where credit for commercialand residential ventures, including home mortgages, has dropped allyear, a decline that even accelerated in June, though spotty datafor July suggest stability. But then even the optimists at the Fedhad little expectation of a near-term pickup in this kind oflending.

More significant is the increase in commercial and industrialloans, which have risen at an annual rate of better than 11%year-to-date. This surge, along with modest growth in consumerloans, has lifted all bank lending at better than a 4% annual rateso far this year. From the Fed's point of view, this flow surelyindicates that past monetary ease, that pool of unused reserves, isat last flowing toward real economic uses. The increase in lendinghardly means that the Fed has accomplished its cyclical mission,but it does provide a reason to hesitate before making stillanother grand gesture, however much Wall Street wants it.

So both to accommodate its own perceptions of risk and reflectthe mix of evidence in its own policy criteria, the Fed has taken await-and-see approach to QE3. Washington's fiscal problem givespolicy makers yet another reason to hold back for the time being.Chairman Bernanke has warned Congress of what he called the “fiscalcliff” of tax hikes and spending restraint scheduled for the newyear unless legislators act to stop them. Given the economy'spresent ambiguous state, he and other monetary policy makers maywant to hold a third round of dramatic ease in reserve on thechance that Congress fails to act and the economy faces what couldbe severe fiscal restraint.