Will The Political Fed Launch New QE With Less Than Two Months To The Election? A Historical Perspective
In two days the entire world will learn if the Fed will do away with all pretense it is not a political agency, and despite a presidential election looking in less than two months, proceed with a third historic round of easing, which according to "experts" may range from nothing (yes, some actually see no point at all to further goosing banker bonuses and the AUM of the uber-wealthy which is all QE4 will achieve), to extension of the ZIRP language, to MBS Twist, to combined purchase of USTs and Agencies, either with a deadline, or open-ended. That pretty much rounds it up. No matter what the Fed does though, the reality is that 100% of Bernanke's action, if not much more, has already been priced in, even though as we explained, Bernanke's hands may actually be quite tied due to simple structural limitations in the bond market, in which the Fed is now a 30%+ active player, and approaching 70% in the long end. Perhaps a bigger question is will Bernanke step back from the trees and notice that the forest is less than 2 months from the presidential election, in essence making the Fed's decision a political one in everyone's mind, regardless if more easing was designed to have a political impact. To answer that, we look at what the Fed has done in the past in the period of 0-2 months before US presidential elections. The result, as Credit Suisse reports, is that "More often than not the policy move inside of the two-month window prior to the election has been an extension of the prior regime." In other words, no transition from turbo-easing to hyper, mega easing. With that said, one must keep in mind that all historical precedents should really be thrown out of the window as never before in history has the Fed found itself at the Z/NIRP boundary, with a very limited arsenal of action, and with only prayer left that this time it will be different, and central planning will actually work for once.
From Credit Suisse:
The Fed in election season
When the FOMC meets next Wednesday and Thursday, it will be deliberating in the inescapable shadow of election season. In an election long characterized as a referendum on the United States’ economic outlook, the Fed’s decisions—and speculation surrounding future actions—are squarely in the political spotlight.
As pundits offer extensive interpretations of every murmur from the Fed, questions abound as to whether the Fed would even dare to act so close to Election Day. Would this purportedly independent body really want to hurl itself even deeper into the maelstrom by offering up a third round of balance sheet expansion?
Although the specific issues are largely unprecedented—balance sheet expansion has not been a prominent issue ahead of prior elections—there is plenty of precedent for Fed action ahead of a Presidential Election. While most times this represented a move in the same direction as recent policy, there are even instances where the Fed has reversed course near an election – presumably that hurdle is no more than the political hurdle for QE.
Below, we look at the Fed’s rates decisions between September and November of an election year. Looking back at the last 15 elections, we use discount rate, and, where available, the Fed Funds target rate as the proxy for the Fed easing, tightening or standing pat.
An action of tighten represents rising rates, ease indicates rate cuts and nothing is in the situations during which the Fed left rates unchanged. More often than not the policy move inside of the two-month window prior to the election has been an extension of the prior regime.
Action prior to election season refers to the monetary policy environment in the months leading up to September of the election year. Any rate change during election season— September through Election Day—falls under the classification of action during election season. Finally, to determine whether or not the Fed may have waited for the election to pass before moving to a new policy regime, we look at the Fed’s action following the election.