The direction of monetary policy depending on who wins today’s election has been an important discussion with an Obama win expecting to have no impact and a Romney win expected to alter the focus. As an Obama victory will just give us more of the same, I wanted to give a quick opinion on what happens if Romney wins. Firstly, while Romney will likely replace Bernanke with a hawkish Chairman (easy to do relatively speaking), Ben is still in place until Jan 2014. Secondly, the economic dependence on the drip of cheap money is so embedded that any back off from current Fed QE on a Romney win will quickly lead to an economic downturn, something Mitt won’t want to face his 1st yr. Also, Ben knows that his MBS purchase program will be completely diluted with rates rising if he doesn’t embark on QE4, buying Treasuries, when OT expires on Dec 31st. Therefore, at least for the next yr, I believe monetary policy does not change. Now this said, current Fed policy must end at some point, either thru a bond market revolt or a change in Chairmanship. This will be an ugly process as rates spike but it’s a painful adjustment that must occur if the US economy is ever going to get back to a sense of normalcy and out of the world of monetary fantasyland. It will be our own Volcker moment where a recession will have to happen thru a rise in rates in order to set the stage for future healthy growth. To the point of nothing changing short term, Fed Pres Williams yesterday said on his target $600b size of QE3 given at the end of Aug, “It should be at least that big but I would think it would probably be bigger given my view on how slow the economy is going.” On the US$, too many focus on its performance vs the euro and yen and think its been strong of late but today, the Aussie$ is at a 6 week high vs the US$ as the RBA left rates unch and the CAD is still worth more than the US$. In Asia, the yuan and Singapore $ are near record highs vs the US$.
