A milder round of stimulus from the U.S. Federal Reserve next week would be a “double win” for Canada’s economy by helping to boost the U.S. recovery – as long as it works – without sending the loonie soaring.

With the Fed’s policy committee preparing to meet next week in Washington, the central bank is widely expected to launch a fresh round of so-called quantitative easing by buying up hundreds of billions of dollars in securities, a rare step designed to drive longer-term interest rates down when short-term rates are already as low as they can go.

The latest asset-purchase program, however, will be on a much smaller and more gradual scale than many investors had hoped, according to The Wall Street Journal on Wednesday. As the speculation swirled, U.S. stocks and commodities tumbled on the notion that a limited plan would not succeed in kick-starting enough consumer spending and borrowing to spur private-sector hiring and get America’s economy back on solid footing.

Prices for U.S. Treasuries also fell, because investors judged the Fed won’t buy so many of the valued safe-haven securities that they become scarce, and the U.S. dollar gained after suffering in recent weeks in anticipation of the Fed pumping cash into the financial system.

However, even as Canadian fortunes depend heavily on the U.S. economy being nursed back to health as quickly as possible, a measured, cautious approach could be good news on this side of the border, since a more aggressive round of quantitative easing could drive the loonie up sharply by pushing down the U.S. dollar and making Canadian assets more attractive.

Should the Fed’s plan – dubbed QE2 – have the intended effect of keeping longer-term interest rates low, it could cause the Canadian dollar to rise rapidly against the greenback as investors flock to higher-yielding currencies. Also, depending on its size, a more aggressive round of purchases could signal that the Fed is even more worried about the U.S. economy, which would be a bad sign for Canada, too. Already, the Bank of Canada has cut growth forecasts for five consecutive quarters, citing a slower-than-expected U.S. rebound as a key factor.

“The decision to do more would be because the economy is doing worse, so the best thing for Canada would be a modest dose of QE, and the Fed discovering that they don’t need to do any more because the U.S. economy is improving,” Avery Shenfeld, chief economist at CIBC World Markets, said in an interview.

“That would be a double win for Canada, because we would benefit from the economic improvement south of the border, and we wouldn’t have to fend off an ever-appreciating Canadian dollar that would hurt our exports.”

Investors were anticipating the Fed’s next foray into the bond market could reach as much as $2-trillion (U.S.), which would put it in line with the $1.75-trillion worth of asset purchases the central bank made at the worst point of the recession in early 2009. At that time though, there was little justification for baby steps, and much of those purchases were of mortgage-backed securities because the market for them had dried up in the wake of the U.S. housing crisis.

The problem the U.S. faces at this point in its grinding recovery, economists say, is that with borrowing costs already close to record lows, it’s unclear that another round of quantitative easing will do much to stimulate demand. After a temporary boost from the first round last March, unemployment remains high, confidence is low and the Fed seems to have run out of options that have clear, relatively risk-free outcomes.

A mild QE2 might not be sufficient, while a larger plan could stoke inflation down the road.

“There is no Plan C – we’re already on Plan B,” Paul Ashworth, senior U.S. economist for research firm Capital Economics Ltd., said in an interview.

“Short-term interest rates have been at zero for nearly two years in the U.S. Quantitative easing, I don’t think, is going to be particularly effective.” For one thing, Mr. Ashworth argued, even Americans who are able to borrow more are skittish about spending as long as the labour market is so fragile. Businesses, meanwhile, are hoarding cash as they wait for a lasting recovery, so making it easier for them to borrow won’t matter since many don’t need to.

“There are structural problems here, there are balance-sheet problems, there are problems of very low confidence, and I think it’s going to take a lot more to overcome that then just slightly lower long-term interest rates,” Mr. Ashworth said.

Sal Guatieri, a senior economist with BMO Nesbitt Burns, said the solution may be for the Fed’s policy committee – which has been divided over whether more stimulus is wise or necessary – to come up with a compromise that beats markets’ tempered expectations while keeping its purchase plan small enough that investors don’t start worrying about inflation.

“The Fed’s hands are tied, to some extent,” Mr. Guatieri said. “Longer-term Treasury rates are really no lower now than they were a month or two ago when the Fed started musing about QE2, which in my mind suggests there might be pressure on the hawks and the doves at the Fed to come up with some compromise that surprises the market on the upside.”