What are the prospect for QE3 in the immediate term? My thinking may be flawed but it goes as follows:

(1) The Fed prefers to remain politically neutral (especially in an extremely partisan election year) thus there must be overwhelming evidence that QE3 is needed AND a consensus that QE3 can mitigate the current headwinds i.e. outweigh negative unintended consequences –> the Fed will wait.

(2) If congress fails to effectively prevent the fiscal cliff from taking a serious negative toll on the economy, the effectiveness of QE3 will be substantially mitigated which potentially destroys the cost benefit analysis in the first place –> the Fed will wait.

(3) The worse the economy gets the more effective monetary stimulus becomes – thus IF congress decides to let us jump off the fiscal cliff…QE3 will provide much more benefit ONCE the negative impacts of the fiscal cliff are well underway–> the Fed will wait.

What am I missing? I just don’t see how the Fed could act on QE3 now, with an irrational and incompetent congress at the helm. Acting now would surely yield QE3 impotent AND make the monetary policy ammo box get that much more thin IF this congress can’t get their act together. Plus, and I could be wrong, it seems like monetary stimulus is more likely to have a positive impact on the economy when it is not wasted mitigating incremental economic deterioration brought about by NEW bad policy errors.

If you agree with the gist of my logic…do you think the market is setting itself up for a let down if the Fed doesn’t act now?

Thanks for your time.

Danny