QE3 is a monetary policy of the US which has been brought under the limelight in light of the FOMC meeting. Lots of analysts and policymakers worldwide have tried to derive the pros and cons of such measures as the US economy undertakes to reverse its bleeding economy into its prosperity phase of yesteryears. While the main question enveloping the Federal Reserve is whether it will undertake another round of QE, the central bank may have a different weapon in its armor waiting to be unleashed.

The European-style Funding for Lending scheme has emerged as a possible alternative in some quarters that could allow the Fed to stimulate the underscoring economy than the outright popular QE. A case in point would be of the Bank of England, who have already undertaken a similar program, and a close resemblance could happen in the US should Bernanke decide that the economy requires more liquidity in the form of bank-provided credit.

What is the Funding for Lending scheme? In the UK’s case, the Bank of England is lending short-term government bills to banks, which use the securities as collateral to borrow money from the central banks at a rock-bottom rate-about 0.25%-and then make loans. Subsequently, banks can borrow up to 5% of the value of their existing loan books, and the loans from the Bank of England are of four years duration. The program grabs close resemblance to something the Fed tried in the aftermath of the financial crisis that exploded in 2008-Term Asset Backed Securities Loan Facility.

However, instituting a similar program could be somewhat challenging for the lender of the last resort of US. Firstly, the Fed will be out of short-term debt when it wraps up its Operation Twist program by the end of 2012. To refresh the memory, the Operation Twist involved selling short-term debt and buying longer-term notes in an attempt to drive down interest rates. Secondly, there is some legal dilemma over what type of collateral the Fed can accept if it cannot lend T-bills.

Yes, there are obstacles in instituting this less popularized program. Yet, the Fed will dwell on the impending problem and will try to implement every action possible before they finally turn to the dreaded measure of Quantitative Easing.