With Mitt Romney taking the lead in the polls ahead of Barack Obama in the presidential election race, a lot of investors are wondering how Federal Reserve policy might change under a Romney presidency.
Another related question is whether or not Bernanke would get to stick around as chairman if Romney were elected president.
The answer to both questions is that there is likely to be very little change at the Fed at all.
At a conference yesterday, Jim Bianco presented his theory that the market was falling because Mitt Romney was emerging as a more likely presidential candidate, and investors were consequently expecting Fed policy to become more hawkish (or more restrained when it comes to monetary easing) down the line.
In addition, there seems to be something of a positive correlation between Obama's re-election odds on InTrade and the stock market.
Romney has been outspoken about Fed policy on the campaign trail. Before the Fed announced its historic open-ended bond-buying program last month – QE3 – Romney was already bashing it (like many others).
"I don't think QE2 was terribly effective, I think a QE3 and other Fed stimulus is not going to help this economy," Romney told [Fox Business News' Peter] Barnes. "I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation's needs."
Despite all of this, however, Bernanke is likely to stay on if Romney gets elected.
Andy Laperriere, the head of policy research at ISI Group, offers a cogent explanation of why that is the case:
Unlike other GOP presidential hopefuls, Romney has never said that he would try to replace Bernanke before his term as Fed chairman is over. In fact, firing a Fed chairman (or the chairman of any other independent agency) is not an easy task. The Federal Reserve Act as well as court opinions suggest it could be done only for cause, not simply because the chairman has policy views different from those of the administration. After all, Congress’ purpose when setting up independent agencies was precisely to insulate them from political pressure.
That said, if Romney wanted to he could ask Bernanke to resign at any time before Bernanke’s term is over. In that case, Bernanke would probably find it hard to remain as chairman. Other heads of independent institutions, such as then-SEC Chairman Pitt in the wake of the Enron debacle, have resigned when political leaders openly asked them to do so.
But it is highly unlikely Romney will ask Bernanke to resign. First and foremost, he would likely be concerned that a forced resignation of a Fed chairman, which has never happened before, would call into question the independence of the institution and set a bad precedent. Such a move would be highly politically controversial and could also unsettle financial markets. It’s hard to see the upside of such a course of action. In all likelihood, Romney would let Bernanke serve out his term and then replace him with a candidate more aligned with Romney’s and the GOP’s views on monetary policy.
That answers the Bernanke question. Once Romney is elected, he will probably look to stick closely to the path of least political resistance, and that seems to coincide with the scenario that Bernanke stays on as Fed chairman in 2013.
The next question becomes Fed monetary policy beyond that, after Bernanke's term is up. This is where it gets really interesting.
At that point, Romney would presumably have an opportunity to replace Bernanke with whomever he wants. However, this as well is likely not that simple.
As Laperriere notes:
Romney would also have to consider that, as important as the Fed chair is, policy decisions at the Fed are still made by a majority of the FOMC.
The composition of the FOMC in 2014 might change some from what it is today, but a large contingent of monetary policy “doves” will likely remain. As a consequence, there is a risk that a Fed chair that pushed for too radical a departure from current policy could end up in the minority. While there is nothing unusual for some central bank heads to be in the minority at times (Mervyn King has been there on a few occasions during his tenure at the helm of the Bank of England), it would be an extraordinary event for a Fed chairman. The threshold for putting a Fed chairman in the minority is probably high, but if it were to happen it could undermine both the effectiveness of the central bank and the GOP objective of a more hawkish Fed.
Bottom line: This issue may not be up for much discussion in a month or so, regardless of whether Romney is elected or not.
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