What Happens if Romney Wins and Bernanke Leaves the Fed?

Pinnacle Digest writes: In Axel Merk’s latest article he addresses what’s at stake in this Presidential election. Little attention has been paid to monetary policy during this election season, yet it is likely the single most important issue for American households. Romney has vowed, that if elected, he would get rid of Bernanke, whose term at the Fed is set to expire in January of 2014. So what would happen if Bernanke leaves the Fed? He has already promised to keep interest rates low until mid 2015. “The election may impact everything from mortgage costs to the cost of financing the U.S. debt. Trillions are at stake, as well as the fate of the U.S. dollar” stated Axel Merk.


Merk went on to state “Should Obama be re-elected, Bernanke might continue to serve as Fed Chairman; other likely candidates include the Fed’s Vice Chairman Janet Yellen and Obama’s former economic advisor Christina Romer. With any of them, we expect the Fed policy to be continuingly dominated by the dovish camp, and moving – with varying enthusiasm depending on the pick of Fed Chair – towards a formal employment target, further diluting any inflation target.”


Merk believes that should Romney win, his likely appointee for the chair of the Fed is Glenn Hubbard, Dean of Columbia Business School and a top economic advisor. Interestingly enough, Hubbard has been an outspoken critic of Bernanke’s policy and doesn’t believe it to be correct. If Romney is elected would monetary policy really tighten up? Could rates skyrocket?


These are very serious concerns.


Bernanke has repeatedly stated that should the rates be raised too quickly, the market and economy could fall back into a tailspin as de-leveraging would pick up pace once again.


Merk points to the fact that Europeans are complaining when rates increase to 4%, and have called 7% unsustainable. The US has far more debt than the EU and with so much stimulus in the system, which is keeping the economy from stalling, raising rates and pulling in liquidity could have a devastating consequence. If a new Fed was willing to go back into a recession to raise rates, it may in fact cause a depression. This is an unfortunate consequence of the excessive amount of stimulus implemented over the last 4 years.


Merk states “Our forecast is that with a Republican administration, we are likely to get a rather volatile interest rate environment, as any attempt to tighten may have to be reversed rather quickly. Fasten your seatbelts, as shockwaves may be expressed in the bond market and the “tranquility” investors have fled to by chasing U.S. bonds may well come to an end. Foreigners that have historically been large buyers of U.S. bonds may well reduce their appetite to finance U.S. debt, with potentially negative implications for the U.S. dollar.”


While we don’t necessarily agree with Merk on this point, considering the fact that interest rates dropped to record lows when Bush (a Republican) was in power, it is worth considering. Romney appears to be much more fiscally conservative than Bush and Obama, but if that impacts monetary policy is unknown. And as Merk states, it is the FOMC who dictates rates, not the POTUS.


Take a look at the sentiment for monetary easing amongst the current FOMC members:



Four current voting members of the FOMC will be replaced next year.  According to Merk“Richmond Fed president Jeffrey Lacker, who has dissented in every FOMC meeting this year. Regional Fed Presidents, unlike Governors, vote on a rotating basis. In 2013, Kansas Fed president Esther George is likely to be the only voting member who appears to hold a hawkish stance. George has expressed her opposition to QE3 and the Fed’s balance sheet expansion, echoing her predecessor Thomas Hoenig's hawkish tone. But given that she is not a Ph.D. economist, her passion and influence is likely to be more on regulatory than monetary issues; we doubt she will be as vocal as Hoenig or Lacker. In our assessment, the FOMC committee may be “über-dovish” in 2013.”


Click here to read Merk’s full report.