With the Fed’s Open Market Committeeset to meet next week, expectations are rising that the languishing housing market will drive the central bank to buy up mortgage-backed securities.

The goal of the purchases will be to drive down interest rates even further from current record-low levels, and, less obviously, to spur confidence that more monetary tools remain to stimulate the economy.

Of course, the announcement also could push stock prices higher, as did the Fed's last balance sheet expansion begun in November 2010.

Just a few months ago, market observers speculated that another round of quantitative easing — QE3, in this case — would be politically infeasible and probably unnecessary given hopes for better growth in 2012.

But with housingstuck in neutral and a European recession on the horizon, economists believe QE3 is all but certain.

Andrew Wilkinson, chief economic strategist at Miller Tabak, released a paper Thursday that makes the case for more easing, which he said could push stock prices higher to where the Standard & Poor’s 500 rises another 11 percent to 1450.

Among a host of supporting data points, perhaps the most interesting is that comparing the amount of equity homeowners have to disposable household income reveals a stunning fact: the ratio has fallen to 54 percent, which Wilkinson called "unprecedented" territory.

The upshot is that because home values have fallen so far, real wealth has plunged as well. And the reason home values have fallen so far is because excess inventory is pushing down prices, a phenomenon he thinks the Fed has no choice but to fight.

"This simple fact represents uncharted territory for the Federal Reserve," Wilkinson wrote. "Despite a recovery in growth and employment, the crippling damage inflicted by the subprime warhorse continues to play a worrisome role behind the scenes."

The Fed amplified its own concerns over this issue in a white paper Chairman Ben Bernanke recently sent to Congress, in a move criticized by some as overreaching the central bank’s authority by trying to twist the collective arm of Congress.

Bernanke’s goal was for Congress to allocate funding that would help in mortgage modifications and restore value to the market.

To follow up its request to Congress, Wilkinson expects action from the Fed, and soon.

"There seems little point in waiting to implement further easing, and to do so could confuse the message the Fed is trying to deliver at a point in time when it is trying to make its communication with the public clearer," he said.

The $1 trillion price tag — Citigroup economistsa few weeks ago also envisioned QE3 at that level — is significant in that it will send the Fed’s balance sheet to about $3.9 trillion and likely spark a war with Congress over the threat of inflation.

But the recent easing of inflation pressures, combined with dithering of Congress, sets a delicate stage for the Fed to take the political risk.

"Obama Administration officials have come to realize that the ongoing dysfunction in the mortgage market is a key impediment to sustained expansion," Vincent Reinhart, chief U.S. economist at Morgan Stanley, said in a note.