When looking at the Fed’s options for tomorrow, there are about three outcomes that are most likely and each will create its own market reaction.
Scenario 1: The Fed introduces QE3 to the world with the promise to purchase $850 billion of longer-term Treasury securities.
Scenario 2: The Fed introduces QE3 to the world with the promise to purchase less than $500 billion of longer-term Treasury securities.
Scenario 3: The Fed does not introduce any form of QE3 and again repeats the mantra that they are frustrated with the current pace of growth of the economy, but isn’t bad enough for them to use such an extraordinary monetary policy tool such as Large Scale Asset Purchases.
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