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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.

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