The Federal Reserve is close to embarking on another round of monetary stimulus next week, against the backdrop of a weak economy and low inflation-and despite doubts about the wisdom and efficacy of the policy among economists and some of the Fed's own decision makers.

The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.

The Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates. It hopes that would spur more investment and spending and liven up the recovery. But officials want to avoid the "shock and awe" style used during the crisis in favor of an approach that allows them to adjust their policy, and possibly add to their purchases, over time as the recovery unfolds.

Fed Chairman Ben Bernanke's push to restart the bond-buying program-a form of monetary stimulus known as quantitative easing-has been greeted with deep skepticism among some of his colleagues.

In some of his strongest words yet, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said Monday that more expansive monetary policy was a "bargain with the devil."

David Fuller's view Until recently, expectations of this additional stimulus had pumped up global stock markets and commodities, and weakened the USD. This has led to some criticism of the Fed, particularly in other countries.

Within the USA a growing minority of commentators have also urged the Fed to create a somewhat higher rate of inflation. Consequently, I disagree with the WSJ's comment above: "The Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates."

This was certainly the aim during the 2008 crisis and partial recovery in 2009, and the Fed was successful in at least lowering rates significantly. However rates are not today's problem. The Fed cannot have both ultra low rates in response to the earlier credit crisis, plus recovery expectations, if companies and consumers fear deflation and minimal GDP growth, of which low long-term rates is a symptom.

The Fed is under pressure to deliver on the employment side of its dual mandate and this would be less difficult to achieve if expectations in the USA shifted away from fear of a deflationary slump and closer to the global recovery signaled by higher asset prices.

What about the markets?

I referred to some book squaring in my headline above. Markets sometimes run ahead of events and we have seen some very persistent rallies in a number of stock markets and commodities since late August. This was mostly a reappraisal of conditions following extremely bearish sentiment in the USA and much of Europe only two months ago. As the rally gathered momentum it understandably gained converts from the bearish hypothesis. It was also fuelled by Mr Bernanke's earlier comments about doing whatever was necessary in terms of additional stimulus.

Traders have been reducing some market exposure recently. This has steadied the US dollar - the carry trade of choice recently, as you can see with short covering causing a loss of downward momentum for the US Dollar Index, and against the previously super-strong Singapore dollar, and from a less strong Australian dollar.

As traders move back into their funding currency the global stock market rally has lost some momentum following persistent gains, as you can see from the FTSE 100 Index, to India's Sensex and Singapore's FSSTI.

Commodities are also taking a breather, evidenced by, gold, copper and sugar.

Persistent trends eventually give way to some turbulence as supply and demand move back into balance or sometimes reverse for a while. Over the near term, we can expect some additional choppy activity and a further retracement of recent gains in a number of temporarily overstretched markets. We could also see some medium-term mean reversion corrections in markets which have done best recently. This would create additional buying opportunities in Fullermoney themes.