What the Fed's QE2 may look like

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The Fed's first move is probably buying more Treasuries; its recent decision to reinvest maturing mortgage-backed securities in Treasuries indicates it favors this approach. 

Greenlaw doubts this will be effective, however, because Treasury yields are already low and even when the Fed did purchase large amounts of Treasuries, rates on mortgages and corporate debt held "close to normal levels."

Instead, he believes purchasing mortgages and corporate debt directly would be more effective in making money cheaper in those sectors.  Although the Fed actually cannot legally purchase private debt, there are ways around this rule, said Greenlaw.

In particular, the Fed can set up financing vehicles -- the Term Asset-Backed Loan Facility (TALF) and the Commercial Paper Funding Facility (CPFF) are examples -- to indirectly purchase private debt.

Nevertheless, creating vehicles like the TALF already puts the Fed "close to the edges of its authority."  Creating new facilities like it will be complicated and require special creativity from the Fed, said Greenlaw. 

At the next Fed meeting, officials will likely debate the pros and cons of various stimulus options to be deployed if the economy further deteriorates.  This is in stark contrast to just several months ago, when Fed officials were busy debating exit strategies, said Greenlaw.

Email Hao Li in New York at hao.li@IBTimes.com