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.