CONCLUSION: As we’ve previously stated, political headwinds, especially from Romney and Ryan, will serve to inhibit further monetary easing out of the Fed between now and election day.
America’s currency (via the DXY), which is bullish TREND and TAIL on our quantitative factoring, loves how the political winds are blowing of late. More specifically, international FX investors continue to see what we see – Bernanke being forced into a tighter and tighter box as we head into the heart of election season.
On our APR 13th 2Q Macro Themes Conference Call, we identified the intermediate-term political calendar as a headwind to further iterations of QE out of the Federal Reserve and continue to view it as such. As part of our Asymmetric Risks theme, we walked through the logic and reasoning behind our conclusion in slides 38-41 of that presentation. To access the replay podcast and the presentation materials, please copy/paste the following two links into the URL of your browser:
- PODCAST: https://app.hedgeye.com/feed_items/19596-q2-macro-themes
- SLIDES: http://docs.hedgeye.com/Q22012.pdf
Jumping ahead, we encourage you to check out the following Bloomberg article titled, “Romney-Ryan See Fed QE As Inflation Risk Amid Low Prices”. While the article, written by Jeff Kearns and Joshua Zumbrun, demonstrates a clear bias that attempts to make Romney and Ryan look like economic donkeys for being worried about the inflationary impact of incremental QE on US consumers and businesses “amid low prices”, we were able to glean few key quotes from Republican presidential candidate Mitt Romney that we don’t think the #BailoutBull crowd is currently factoring into their immediate-to-intermediate term expectations for Fed policy:
- Romney said on June 17 the second round of quantitative easing was ineffective while potentially causing inflation and undermining the dollar. A third round would pose the same risks, he said. (Bloomberg)
- “QE2, as it’s called, which was a monetary stimulus, did not have the desired effect,” the former Massachusetts governor said in an interview on CBS’s “Face the Nation.” “It was not extraordinarily harmful, but it does put in question the future value of the dollar, and will, obviously, encourage some inflation.” (Bloomberg)
- “A QE3 would do the same thing,” Romney said. “But the potential threat down the road in inflation is something which we have to be aware of, and the last QE2, the last monetary stimulus, did not put Americans back to work, did not raise our home values, did not bring jobs back to this country or encourage small businesses to open their doors.” (Bloomberg)
Romney’s new running mate, Paul Ryan, has been even more outspoken and negative on the Fed’s expansionary monetary policy and we think his influence can force the Fed’s policies into the mainstream focus and do one of two things:
- Significantly raise the bar for further QE due to Bernanke feeling increased political heat; or
- Force Obama to either defend or reject the quantitative easing policy in a very public forum – either of which is prohibitive for a new round of QE. The former because A) he knows Bernanke would look incrementally politicized by pursing action amid such heightened political rhetoric; and B) members of the Federal Reserve would have to talk down their assessment of the economy in conjunction with announcing a new LSAP. The last thing the Obama campaign needs right now are bureaucrats that he appointed talking negatively about the economy.
Jumping back to Ryan specifically, in a 2H10 piece co-authored by renowned Stanford economist John Taylor, Ryan remarked (with Taylor):
- “Quantitative easing is part of a recent Fed trend toward discretionary and away from rules-based monetary actions. The consequences of this trend are clear: The Fed's decision to hold interest rates too low for too long from 2002 to 2004 exacerbated the formation of the housing bubble. And while the Fed did help to arrest the ensuing panic in the fall of 2008, its subsequent interventions have done more long-run harm than good.”
- “QE1 failed to strengthen the economy, which has remained in a high-unemployment, low-growth slump, and there is no convincing evidence that QE2 will help either. On the contrary, QE2 will create more economic uncertainty, stemming mainly from reasonable doubts over whether the Fed will know exactly when and how to contract its balance sheet after such an unprecedented expansion.”
- “While consistent with the "sugar-high economics" practiced in Washington of late, quantitative easing marks a further departure from the foundations for prosperity and another step toward an increasingly politicized central bank.”
- “For all of these reasons, Congress should reform the Federal Reserve Act, particularly the section of the act that establishes the Fed's dual mandate. The Fed should be tasked with the single goal of long-run price stability within a clear framework of overall economic stability. Such a reform would not prevent the Fed from providing liquidity, serving as lender of last resort, or cutting interest rates in a financial crisis or a recession.”
- “Experience shows that a focus on price stability is the surest way for monetary policy to lay the groundwork for strong economic growth. The 1980s and 1990s had better economic performance than the stagflationary 1970s in part because the Fed did not waver from its primary goal of checking inflation.”
- “In particular, the Fed should explicitly publish and follow a monetary rule as its means to achieve price stability. Such a rule should include, among other things: greater simplicity; a description of interest-rate responses to economic developments including how the Fed will achieve those responses through money growth; and greater attention to commodity prices, including food and energy, as opposed to a myopic overemphasis on core inflation.”
All told, we continue to anticipate growing political headwinds to further iterations of monetary easing out of the Fed, with the general election and preceding debates serving as a much-needed forum to publically discuss the course of US monetary policy. We think that is likely to keep Bernanke in his box until at least after the election. And while Romney may be getting crushed by Obama on our proprietary Election Indicator and in various polls across the country, we think a narrowing of that spread is in the cards and that this is the key political risk to manage over the TRADE and TREND durations.