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Fed Remains Noncommittal About New Stimulus, Despite Sluggish Economy

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With the debt-ceiling fight resolved, and discouraging economic reports piling up, the Federal Reserve is under close scrutiny for signs that it might undertake a new stimulus effort known as QE3.

Falling consumer confidence, desultory consumer spending, and disappointing employment and GDP reports have stimulus advocates wondering whether the Fed will use a third round of quantitative easing, or QE3, in an attempt to catalyze growth and keep deflation at bay.

But reports indicate that the Fed is unlikely to do so, at least any time soon. Chairman Ben Bernanke has downplayed the possibility of QE3 and said that the Fed is “not ready to take any new action” unless it becomes apparent that the economy will not recover otherwise.

The Federal Reserve ended its second round of quantitative easing, a bond-buying program known as QE2, in June.

Quantitative easing is meant to put more money in circulation, something the Fed accomplished by buying up $600 in Treasury bonds between November 2010 and June 2011. This had the effect of nudging inflation rates higher -- which the Fed intended to do -- and making Treasuries scarcer and thus more expensive, which in turn stimulated stock investment.

Yet critics of quantitative easing say that it leaves the economy vulnerable to high levels of inflation. Evidence suggests a correlation between quantitative easing, which floods commodities markets with cash, and high food and gas prices, which can have a net effect of restraining consumer spending.

A Commerce Department report released Tuesday suggests that inflation is being held in check, at least for the moment. Consumer prices fell in June for the first time in a year, which, though only a single data point, is actually an indicator of deflation, as The New York Times points out.

Bernanke has repeatedly predicted that the economy will grow faster in the second half of 2011 than it did in the first. Yet he has also acknowledged that some of the factors keeping the pace of growth slow “may be stronger and more persistent than we thought.”

Analysts have cited the Commerce Department’s most recent GDP report, which showed lackluster growth in the second quarter and sharply revised downward the gains posted in the first quarter, as evidence that the recovery is likely to remain sluggish for the foreseeable future.

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