It's the $500 billion question: will the Federal Reserve's Open Market Committee order another round of quantitative easing ("QE2") when it meets in November? The detailed minutes were released today from the FOMC's September 21st meeting. Ever since its brief statement was released last month, the market has been speculating that QE2 is imminent, with many people arguing that the Fed showed its hand by expressing its readiness to act. But the minutes provide additional uncertainty on whether we'll see more monetary expansion in November.

What Deflation?

One reason why it seemed more plausible that the Fed would expand monetary policy was that it expressed new concern over the price level. If inflation is lower than its target, then additional money supply could help to raise it. Yet, the minutes say that inflation hasn't declined much in recent months. Moreover, committee members hadn't changed their inflation expectations significantly in September. The minutes say:

Although prices of some commodities and imported goods had risen recently, many business contacts reported that they currently had little pricing power and that they anticipated limited, if any, increases in labor costs. Meeting participants noted that several measures of inflation expectations had changed little, on net, over the intermeeting period and that analysis of the components of price indexes suggested disinflation might be abating. However, TIPS-based inflation compensation had declined, on balance, in recent quarters. While underlying inflation remained subdued, participants saw only small odds of deflation.

In other words, there's only mild concern about the piece level. Without much fear of deflation, the basis for QE2 must rely almost entirely on the Fed's mandate to encourage full employment.

What Deterioration?

And certainly, U.S. unemployment remains high. But the FOMC members also seem rather convinced that a recovery is underway -- it's just very slow. The minutes say:

In their discussion of the economic situation and outlook, meeting participants generally agreed that the incoming data indicated that output and employment were increasing only slowly and at rates well below those recorded earlier in the year. Although participants considered it unlikely that the economy would reenter a recession, many expressed concern that output growth, and the associated progress in reducing the level of unemployment, could be slow for some time . . . Nevertheless, participants judged the economic recovery to be continuing and generally expected growth to pick up gradually next year.

That doesn't make it sound like an aggressive measure to restart the currency printing presses is inevitable. At most, it appears to indicate that, if the data that comes in by the next meeting shows a significant step backwards for the U.S. economy, then the FOMC may take action. At this time, however, the FOMC isn't very worried about a double dip recession, since members believe the economy is in a slow recovery.

Does a Split Fed Mean No Action?

But one thing is also clear from the minutes: the FOMC is split. Check out the following excerpt from the conclusion of the minutes (my emphasis):

Although many members considered the recent and anticipated progress toward meeting the Committee's mandate of maximum employment and price stability to be unsatisfactory, members observed that incoming data over the intermeeting period indicated that the economic recovery was continuing, albeit slowly. Moreover, the data had been mixed, with readings early in the period generally weaker than anticipated but the more-recent data coming in on the strong side of expectations. In light of the considerable uncertainty about the current trajectory for the economy, some members saw merit in accumulating further information before reaching a decision about providing additional monetary stimulus. In addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus. Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee's mandate, they would consider it appropriate to take action soon.

In short, "many members" lament the high unemployment rate; "some members" want to see more negative data before taking action; and "several members" want QE2 if the economic recovery doesn't speed up.

Although it's hard to interpret qualitative terminology, this raises a question. Will the FOMC really implement QE2 if "several members" support doing so, while "some members" do not? QE2 is bound to be controversial, and the way the minutes read, we've got more than just one committee member against further expansionary action unless the economic data that comes in reflects clear deterioration. The September data thus far hasn't shown that, which might foreshadow a split at the November meeting. If the Fed wants to act in near-unison, and it often prefers to, then QE2 might not happen.