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Federal Reserve Chairman Ben Bernanke (J. Scott Applewhite/AP)

Federal Reserve Chairman Ben Bernanke

(J. Scott Applewhite/AP)

Waiting for QE3...or QE4? Add to ...

The Federal Reserve is now discussing monetary policy, with no doubt a lot of time being spent on discussing the pros and cons of unleashing another round of economic stimulus.

Markets are holding their collective breath: The Fed could extend the date in which it has promised to hold its key interest rate at exceptionally low levels – say, shifting from late 2014 to 2015. Or it could opt for outright bond-buying using a strategy known as quantitative easing, or QE.

Either way, the impact on stocks could be huge when the policy announcement is made on Thursday. But if you a think that a third round of QE is just the thing to get the U.S. economic recovery humming again, what about a fourth round?

Michael Gregory, senior economist at BMO Nesbitt Burns, thinks that the odds of QE3 – as a third round is called – are good, but not a done deal. He pegs the odds at about 35 per cent to 45 per cent, simply because the Fed could stick to its previous practice of unleashing quantitative easing only when weakening economic performance was likely increasing the risks of deflation, which isn’t the case today.

But if the Fed does announce QE3 on Thursday, it suggests that the bar for providing such stimulus has now been set so low that a fourth round of QE – that would be QE4 – is on the table.

“If the Fed does QE3...it would mark a shift in the Fed’s policy reaction function, an alteration that would likely generate more accommodative responses to the same set of incoming information going forward,” Mr. Gregory said in a note. “This means QE3, at this stage, would make QE4 even more likely....”

He thinks another round of quantitative easing is more likely next year, when the repeal of the U.S. payroll tax holiday – part of the so-called fiscal cliff – will weigh on economic performance.

“QE is only a matter of time; it’s just not this time,” he said.

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