Fed’s Monetary Stimulus Meets “Fiscal Cliff”

The contrast could not be sharper: Economists are all but certain the U.S. Federal Reserve will expand its monetary stimulus this week, but they have no clue how the fiscal battle in Congress will shake out.

U.S. central bankers look set to extend their monetary stimulus, known as Quantitative Easing, into the new year at a meeting on Tuesday and Wednesday. Analysts expect the Fed to continue buying $85 billion worth of securities per month.

"The Fed would not have emphasized the number ‘$85 billion' in securities purchases in its statement if it wasn't prepared to continue at that pace well beyond the end of the year," said Roberto Perli, a senior managing director at investment research firm ISI.

No matter what it does, Fed Chairman Ben Bernanke has made it clear the central bank lacks the firepower to counter the possible drag from the looming $600 billion combination of expiring tax cuts and automatic spending reductions popularly known as the "fiscal cliff."

Alarm over an immediate, looming deadline may be overstated. Some analysts say the cliff is better described as a slope, since not all provisions will kick in at once. But Congress' budget watchdog and the Fed both think it spells recession.

The world is watching with bated breath, particularly given the fragile state of other major economies.