Royal Bank of Scotland released a report today that said it expects the Federal Reserve to announce a third round of quantitative easing at the Sept. 12-13 meeting.

However, uncertainty remains over how the purchase program will be structured.

The bank expects the Fed to announce open-ended asset buys, but it should commit to purchasing at least $600 billion in Treasurys and MBS between Oct. 12 and March 31, 2013. It also anticipates that the Fed will announce its intention to continue buying both Treasurys and MBS after March (either at that same monthly rate or a pace to be specified later) until sustainable economic growth has been achieved.

RBS also thinks that whatever the minimum size of MBS purchases announced, the key detail will be if that amount covers reinvestment buys. The bank thinks that the $300 billion MBS purchases or $50 billion per month includes the $25 billion-$30 billion in reinvestment purchases now executed each month.

This is why the amount of balance sheet expansion tied to mortgages will be less than the headline figure announced. But, any disappointment with respect to program size should be offset by the fact that the purchases are open-ended.

In terms of Treasurys, RBS thinks that policymakers will announce that, as of Sept. 30, sales of short-term Treasurys previously announced as part of Operation Twist will be ended, while purchases of longer-term Treasurys will continue at a slightly faster pace or $50 billion per month versus $45 billion now under Operation Twist.

With short-term sales done, the Fed’s balance sheet will start expanding right away by the full amount of the long-term Treasury purchases. While only a little bit more than onehalf of the $300 billion in Treasury purchases announced under QE3 will be “new” or over and above what was already set to take place from October through December as part of Operation Twist, the fact that the purchases are open-ended should lessen any disappointment in the market.

Away from QE3, RBS expects there to be significantly high odds of the Fed extending its forward guidance on rates through mid-2015. This would promote a lower-for-even-longer interest rate scenario.

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