An increasing number of Economists believe The Feds third round of Quantitative Easing, otherwise known as QE3, is likely and that it will be in the $1 trillion realm. The idea stems from what is seen as a shaky rise in economic growth and the announcement could be made later this month.

With the Federal Reserve’s Open Market Committee scheduled to meet next week, expectations are mounting that the suffering housing market will drive the central bank to buy up more mortgage-backed securities (MBS).The goal of the purchases will be to send interest rates down, past current record-level lows, and a veiled attempt to spur confidence that more monetary tools remain to stimulate the economy. Of course, the statement could also drive stock prices higher, as did the Fed’s last ballooning balance sheet that started in November 2010.

A few short months ago, market analysts thought that another helping of quantitative easing would be politically unworkable and probably not needed given the possibilities for better growth in 2012. However, with the housing market going nowhere and a European recession on the horizon, economists think QE3 is now unavoidable.

Andrew Wilkinson, chief economic strategist at Miller Tabak, issued a paper Thursday that supports more easing, which he said could push stock prices higher. The paper points out that the ratio of equity homeowners have, compared to disposable household income has fallen to 54 percent, which Wilkinson called “unprecedented.”

As a result of the fall in home values, real wealth has fallen as well. And the reason home values have tumbled so far is that excess inventory is forcing down prices, a situation he thinks the Fed must wrestle with. “This simple fact represents uncharted territory for the Federal Reserve,” Wilkinson stated. “Despite a recovery in growth and employment, the crippling damage inflicted by the subprime warhorse continues to play a worrisome role behind the scenes.”

Let’s hope the message gets through to those in congress who are toying with the idea that the time has come to get rid of home mortgage interest deductions.

“Obama Administration officials have come to realize that the ongoing dysfunction in the mortgage market is a key impediment to sustained expansion,” Vincent Reinhart, chief U.S. economist at Morgan Stanley, observed in a note. “Their problem is that there is no chance of coming to terms with the Congress to fix the mess,” Reinhart said. “The result is that the administration is moving toward mortgage modification, but not decisively. Purchasing MBS is a way that the Fed can support that movement and signal the seriousness of the enterprise.”

Reinhart sees QE3 to go up to only $750 billion, implemented in March – but his view for the most part, is the same: The economic upticks are unlikely to last and the Fed will be forced to act. He sees growth of GDP in 2012 at a below consensus 2 percent. The reason for the poor outlook is that the improvements mask unsustainable fundamentals – an unusual fall in the savings rate, a rise in auto purchases due primarily to Japan’s bouncing back from natural disasters last spring, and a jump in inventories.

The recovery of the stock market is likely fleeting, in the opinion of Bank of America Merrill Lynch economist Neil Dutta, who observes that the bond market and the firm’s measure of liquidity both signal slowing conditions. “Most markets are indicating that the current gains in U.S. growth will not continue,” Dutta said. “It is hard to find an area in the financial markets that corroborates the stock market’s signal on growth.” So much for the Feds third round of Quantitative Easing.