What's that great ship coming over the horizon to rescue us? Is that the QE2? Or is it the Titanic?

That's what the markets want to know now, as they eagerly await word from the Federal Reserve on whether it will launch an additional round of quantitative easing, nicknamed QE2. If the Fed announces that it will indeed buy hundreds of billions of dollars worth of Treasurys or some other security, it could make a real difference to the markets. At this point, with QE2 pretty widely expected to arrive at least in some form and quantity my sense is that the biggest impact could come if the Fed fails to act. The markets could be very, very disappointed.

What will QE2 accomplish for the economy? Maybe nothing at all, which makes the whole thing rather silly.

It's called QE2, but it should really be called QE4. The first QE was in November 2008, back when the banking crisis was still in full swing and the Fed and the Treasury were actively engaged in bailing out Citigroup in various ways. The Fed committed to buying $500 billion worth of mortgage-backed securities and $100 billion in the direct debt obligations of Fannie Mae and Freddie Mac.

The next step and this is the one that should be called QE2 was in March 2009, about a week after stocks hit their final bear market bottom. The Fed announced that it would add $750 billion to its MBS buy and $100 billion to its Fannie and Freddie debt buy, and that it would start an entirely new program of buying $300 billion in long-term Treasury notes and bonds.

The most recent step, which should be called QE3, was this August, when the Fed announced it would buy long-term Treasury notes and bonds with the income thrown off from its MBS portfolio.

So what would QE4 look like? Some highly pedigreed economists think it could be as much as a trillion dollars in Treasury bond purchases. Others the majority, I'd say expect it to be a more modest amount, perhaps $100 billion, with the assurance that more will come if necessary.

I doubt the Fed will buy more mortgage-backed securities. It already owns about 20 percent of that market. I doubt it will buy corporate securities that would be pretty controversial, because the Fed would have to get into the business of picking which companies to support and which not to. And I doubt it would buy municipal securities, even though it might be a good idea to give a little support to the states that are having such terrible budget problems, including New Jersey, Illinois and my own state of California.

So let's say it's Treasurys. What would the effect of that be?

Obviously, it would make Treasury yields lower than they would be otherwise. Or would it? Shortly after the Fed announced its Treasury purchases in March 2009, yields actually went up.

How could that be? It could be that yields were going to go up anyway, for some reason, and that the Fed's presence in the market made them go up less. Or it could be that the Fed's intervention restored confidence in the economy: Yields tend to go down when people are pessimistic, so by making people more optimistic, the Fed drove yields higher.

Or maybe a darker explanation is the right one. Perhaps yields went up because the market was afraid that the Fed was getting into the business of monetizing debt. That's a practice eagerly undertaken by the central banks of most banana republics, eager to prop up their governments' debt binges by buying whatever bonds the generalissimo cares to issue. The result is always debasement of the currency and inflation.

But if you ask officials at the Fed, they ll swear they made Treasury yields lower than they otherwise would have been and that the purpose of buying more debt would be to do that again. But it's an inherently uncertain enterprise, because the Fed is not announcing a target yield. Under normal conditions, the Fed would state its target for overnight interest rates and then do whatever it takes to force the market to that target. It could, for instance, announce a target for the 10-year Treasury yield and again do whatever it takes. But no. Instead, it ll announce a dollar amount of purchases, and then the yield will turn out to be whatever it turns out to be.

Will it cause inflation? Sure. It did last time. Or rather, it stopped deflation. In the earlier instances of QE, the consumer-price index was actually falling. That's been reversed, which is a very good thing, because nothing even inflation is as bad for an economy as deflation. In its most recent policy statement, the Federal Open Market Committee didn't say it was worried about deflation; it said it thought inflation was too low. Another round of QE could fix that.

Will it create jobs? No. At least not directly. If the Fed is right and inflation is too low, then getting it to the right level would improve economic confidence, and that would help job creation. But I'll be darned if I see why inflation is too low. Isn't zero inflation just perfect? We ve already got more than that.

Will it make the stock market go up? It might. If the Fed succeeds in lowering bond yields, that ll make stocks and all other assets more attractive by comparison. It should also drive down borrowing costs throughout the economy, which in turn will help corporate profits, which in turn will help stock prices.

But if I were the Fed, I really doubt I'd bother. Instead, I think I'd just announce that I intended to keep today's policies in place for some specific period say, two years. This would have the benefit of stopping all the guessing all the hopes that there will be QE4, the fears that there won't be. And it would deal with the fact that, worst of all, no one really knows whether QE4 will help or hurt, meaning it s an inherently risky thing to even try.

So here's my fearless prediction: At the next FOMC meeting, the Fed either will do nothing in the way of additional quantitative easing or will do something extremely modest in scope. This will initially disappoint the market, because there are so many people who think (I have no idea why) that QE is the answer to all of life's problems.

But my bet is that after we spend a day or two absorbing the disappointment, stocks will move to new recovery highs. With the Fed not in a panic to experiment, it ll will send a great signal of confidence, and it will give investors the chance to quell their own fears and realize that things just really aren't that bad. In other words, it will be a buying opportunity.