Consensus is building fast that the Federal Reserve will roll out a third round of quantitative easing, possibly as high as $1 trillion and likely by the end of January, economists say.
The Fed has already carried out two rounds of quantitative easing, in which it buys assets from banks with freshly printed money with the aim of steering the economy away from deflation and contraction.
The Federal Open Market Committee, which sets monetary policy, meets next Tuesday and Wednesday and a decision could come then.
While improving economic indicators had many believing a third round, known as QE3 wouldn't be necessary, a slumping housing sector and the onset of recession in Europe may prove otherwise.
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Home values may be falling and even bottoming out, but personal wealth remains battered from the recession, which keeps home prices from recovering and the economy remains stuck in the doldrums before contracting anew.
The ratio of home equity to disposable household income has fallen to 54 percent, which Andrew Wilkinson, chief economic strategist at Miller Tabak, describes as "unprecedented."
"This simple fact represents uncharted territory for the Federal Reserve," Wilkinson writes in a note, according to CNBC.
"Despite a recovery in growth and employment, the crippling damage inflicted by the subprime warhorse continues to play a worrisome role behind the scenes."
Citibank economists are among those predicting $1 trillion asset purchases, while others say the housing sector is so weak, more easing will be necessary despite the inflationary side effects it brings.
"Obama administration officials have come to realize that the ongoing dysfunction in the mortgage market is a key impediment to sustained expansion," writes Vincent Reinhart, chief U.S. economist at Morgan Stanley, CNBC adds.
Others agree, pointing out that despites stronger signs of economic recovery, unemployment rates remain high, growth sluggish and inflation far from galloping out of control, which gives the Fed room for more action to act and prevent an economic relapse.
“The labor market has a special role,” says Ethan Harris, co-head of global economic research at Bank of America Merrill Lynch in New York, according to Bloomberg.
"They are looking for a real healing process there" because job growth "helps drive the housing market, it helps drive the banking system with its bad debt issues, and, obviously, it helps the consumer."
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