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In the last meeting of the FOMC on June 19-20, an extension of Operation Twist was announced. There was a big debate if this is a stepping stone towards QE3, or just a substitute.

The meeting minutes give the impression that it was a substitute: only a major disaster could move the Fed towards expanding the balance sheet. This is supportive of the dollar.

Most FOMC members wanted balance sheet action: 12 out of 19. This includes both voting and non voting members. Such a wide majority, that probably includes Chairman Bernanke, sounds quite dovish.

However, balance sheet action doesn’t mean expanding it with QE3 – it doesn’t mean printing more dollars and devaluing the currency: 11 out of 12 saw more Twist as good enough at this time.

Only “a few” (translation is 2) saw a need for more bond purchases. Two other left the door open for new bond purchases in case of a deterioration – such a deterioration seems “low at present” according to the minutes.

Others took the other direction and wanted to know “how large purchases would have to be to disrupt the Treasury market” – they showed worries about the side effects.

All in all, some worries are expressed and the Fed does leave the door for more action. Nevertheless, the bar for printing more dollars remains quite high.

Next Meeting

The chances of QE3 in the July 31 / August 1 meeting is low. If expectations do rise towards this meeting, they will probably be met with another disappointment. The last QE program, QE2, ended in June 2011. Almost every FOMC meeting since then held expectations for QE3, and resulted in a disappointment.

There’s no reason to believe that this time will be different.