The Federal Reserve's Open Market Committee (FOMC) has left the outlook for additional quantitative easing ambiguous. The summary from the most recent meeting of Fed policy makers expresses confidence that inflation will remain contained and concern over sluggish economic growth, unemployment and the threat of “global financial strains.” The FOMC promises, in response, to keep short-term interest rates low, with the target federal funds rate between 0 and 25 basis points into late 2014. It also promises to continue through year-end “Operation Twist,” in which it buys longer-term Treasury bonds, to sell nothing from its now-extensive portfolio of mortgage-backed securities and even to reinvest any interest and principal payments it receives. But on the crucial issue, the one that weighs on Wall Street's collective mind, of a third quantitative easing—QE3 in the Street's jargon—the Fed remains coy and promises only to respond to the flow of economic and financial information as needed.

It is apparent from this lack of commitment that the Fed remains unsure 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 nonetheless plain in the policy criteria outlined some time ago by Fed Chairman Ben Bernanke. Because inflation seems well contained for the time being, Bernanke identified two areas as policy cues: one is the jobs market, as a test of whether the economy is making acceptable progress, and the other is bank lending, to judge whether past monetary easing is reaching the economy. The inconclusive mix of evidence on these fronts explains the Fed's coy attitude. How events in these areas unfold will determine when and, contrary to the common belief on Wall Street, even if the FOMC will go forward with a QE3.

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