With less than two weeks left to the U.S. presidential elections and all three televised debates done and dusted, investors are at last squaring up to the detailed financial market impact of the event itself and the column inches in newsprint and research reports lengthen by the day.
Barclays interest rate strategists are one of the first to stick hard numbers on likely market outcomes in a report late Tuesday that dug deep into both the well-documented “fiscal cliff” but also into the less discussed uncertainty surrounding the medium-term direction of the Federal Reserve and its leadership.
With news reports suggesting Fed chief Ben Bernanke will not now choose to stand again for a third term at the helm of the U.S. central bank in 2014, some may argue Fed risk from the election has been neutered. But with monetary policy still the only game in town policy-wise for many asset managers – at least on the stimulus side — then even the slightest risk to the Fed’s mandate remains a significant market factor.
Even though it figured almost nowhere in the big public debates, Republican challenger Mitt Romney has vowed that if elected he would not renominate Bernanke to a third term. Romney’s running mate Paul Ryan is an even harsher critic of the Fed, backing legislation that would open up the Fed’s monetary-policy decisions to congressional scrutiny and strip the central bank of its mission to seek full employment. Given that the longevity of the Fed’s third and current round of asset purchases is tied explicitly to cutting the jobless rate, that’s a particularly controversial stance going forward.
The Barlcays strategists, as a result, reckon that if Romney were elected, a more hawkish Fed over time would be more likely than under a re-elected administration of Democrat Barack Obama. And they said it’s possible that Fed funds futures market could see implied Fed interest rates for the end of 2015 jump by as much as 50bp in a knee-jerk reaction to a Romney win and drop 20bp on an Obama victory. (According to Reuters data, September 2015 Fed funds futures are currently implying a rate of 0.60% — compared to the current target of 0-0.25% range — and that has risen about 10bp since the first presidential debate on Oct 3 saw Romney’s opinion poll ratings rise to match and in some cases nudge ahead of Obama’s.)