Federal Reserve Chairman Ben Bernanke looks set to spend the rest of the summer waiting for signs that could tip the scales toward providing another round of stimulus for economy.
On Wednesday, the U.S. central bank stopped short of resorting to new measures but signaled it was prepared to act unless the economy stages an unlikely comeback in the next six weeks.
With the Fed's next policy-setting meeting scheduled for Sept 12-13, guideposts toward yet more monetary easing look clear.
On Thursday, the European Central Bank meets to consider how to stem the euro zone debt crisis that the Fed again on Wednesday suggested posed a threat to the sputtering U.S. economic recovery.
But the chances of aggressive action by the ECB appear slim, with Europe divided on using the central bank to help countries struggling under heavy debts.
On Friday, the U.S. employment report for July is unlikely to provide much relief from the recent slump in job creation and if repeated when the August job numbers are released in early September, it could strengthen the case for more Fed intervention, probably another round of heavy bond-buying.
"Such action is far from a done deal, but we are skeptical that the labor market will convincingly turn around, and so continue to see more asset purchases coming next month," JP Morgan chief economist Michael Feroli said in a note to clients.
While the Fed waits for confirmation that the European crisis and the dip in the U.S. recovery are not going away any time soon, policymakers will also try to work out the most effective way of helping the economy.
"We have an extremely dovish Fed that certainly wants to do something," said Axel Merk, president of Merk Investments. "But they don't want to appear to panic, and if they do something they want it to work. Those are the two things holding it back."
So far this year, the Fed has taken steps to try to help the economy at two of its five policy meetings. It told markets in January that it does not expect to raise short-term interest rates until at least late 2014. And in June it added another six months to its so-called Operation Twist program aimed at lowering long-term interest rates.
But it has not yet resorted again to the kind of measures comparable with its emergency rescue of the economy that began with slashing its benchmark rate to near zero since December 2008, followed by the purchase of $2.3 trillion in Treasuries and housing-backed bonds to re-energize the economy.
NOT WEAK ENOUGH, YET
Many economists expect the Fed's next move to be a third round of bond-buying known as quantitative easing, or QE3.
While recent economic data has been weak -- particularly in job creation, manufacturing and retail sales -- it has not caused alarm on a level needed to trigger QE3, at least not this week. Many economists had predicted the Fed would hold fire.
"Clearly, with the skepticism that you're getting from the hawkish side of the table, the ammunition this time around just was not substantial enough," said Carl Tannenbaum, chief economist at Northern Trust, and former official in the Federal Reserve System.
There are two payroll reports and a retail sales report before the next Fed meeting. July's retail sales report, due on August 14, will show whether consumers, the main drivers of the U.S. economy, remain wary of spending at the start of the third quarter. Retail sales have fallen for three straight months, the longest such streak since the financial crisis erupted in 2008.
Depending on what the data shows, Bernanke may have enough to make a case for more easing by late August, when he is due to give a speech at the central bank's high-profile gathering in Jackson Hole, Wyoming.
He used that forum in 2010 to give a clear indication of the Fed's plan to pursue a second round of quantitative easing.
FED MULLS OPTIONS
Just as important as deciding whether to move, economists say, is the decision on how to do it.
A decision to launch QE3 would probably involve some component of mortgage debt as the Fed attempts to breathe more life into a housing sector that has finally shown some signs of healing. San Francisco Fed President John Williams has long backed this approach, citing studies he says show that buying housing bonds could effectively push down a broad swath of rates more readily than further purchases of Treasuries.
Others such as Jeffrey Lacker of Richmond, Virginia -- who dissented against Wednesday's Fed statement -- oppose it, saying further bond-buying is likely to do little to create jobs and could sow the seeds of inflation.
Other tools under consideration include lowering the interest the Fed pays banks to park reserves at the central bank, currently at 0.25 percent, to induce more bank lending.
Another approach is a "funding for lending" program like the one recently announced by the Bank of England, whereby the Fed might provide cheap short-term loans to banks in exchange for guarantees they will resume lending to individuals and firms.
Increasingly overhanging the Fed debate is the approach of November's elections.
Most economists, and Fed officials themselves, say U.S. central bankers will do what it takes to put the economy back on track. Politicians, especially Republicans, have criticized the Fed's recent policies for risking inflation. Further efforts to shore up the economy could leave the Fed exposed to criticism that it is helping to influence the election.
A few commentators say politics may have played some role in keeping the Fed on hold this week.
"This is a bad time to become a ping-pong for the political bantering that will go on through the end of the year," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts.
Still, Bernanke is unlikely to steer clear of further action if the signs guide him there. Last year, he pushed forward with easing twice over the dissents of three out of 10 of his closest colleagues - the policymakers with whom he debates the future of U.S. interest rate policy every six weeks.