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QE2: Will the Fed Surprise the Markets?

(Updated with latest ADP private-sector employment numbers)

NEW YORK ( TheStreet) -- Will the Federal Reserve's move to boost the flagging U.S. economy be too little to make a difference or will it be too much, too soon? That is the big question for investors anxiously awaiting the Federal Open Market Committee statement on Wednesday afternoon.

The S&P 500 has risen 14% since the central bank first hinted that it will resume the purchase of long-term assets to boost the economy -- dubbed QE2 -- in August. While the prospect of quantitative easing has driven down the dollar and helped push up stocks, investors remain uncertain of what the actual outcome of the Fed's move will be on the economy and job growth, as the central bank heads into unchartered territory.

Skeptics have said that further quantitative easing will do little to help an economy that is stuck in a "liquidity trap" and would only succeed in creating dangerous asset inflation. Supporters argue that the Fed must use every tool it has at its disposal to prevent the economy from slipping back into a recession and to keep the threat of deflation at bay.

Fed chairman Ben Bernanke and his colleagues have, in various speeches over the last two months, tried to steer market expectations in a spirit of transparency. But Fed officials themselves have voiced disagreement on what the size and nature of the monetary stimulus should be -- and some have questioned whether it is warranted at all. The dissent within the central bank has led to divergent market expectations on what the central bank's ultimate announcement will look like.

Estimates have ranged from $50 billion to $100 billion in monthly purchases over several months from those who expect an open-ended approach by the Fed to an injection of anywhere between $500 billion to $1 trillion through the end of 2011 by analysts who predict the central bank will make a more significant push. But the broad consensus appears to be settling at $500 billion.

Brian Bethune of Global Insight expects the Fed to announce a minimum limit of $500 billion, a floor that was set by New York Fed President William Dudley in early October. "The Fed may give a range of $500 billion to $800 billion and make incremental purchases of $100 billion a month, which will then be calibrated to the performance of the economy," said Bethune. "This will give it some wiggle room to do a significant amount but not do too much."

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