Andy Rosenberger, Brinker Capital
Presidential and Vice Presidential candidates Mitt Romney and Paul Ryan wasted no time in criticizing the Federal Reserve’s newest measure to stimulate the U.S. economy through additional monetary policy, otherwise known as Quantitative Easing (QE3). Within hours of the Fed announcement, Mitt Romney likened the need for more easing to failed Obama policies while Paul Ryan later said it represented “sugar-high economics”. The two fiscally minded candidates are understandably frustrated with the new measures by the Fed.
According to intrade.com, a market-based prediction market whereby speculators can gamble real money on the outcome of future events, the probability of President Obama’s reelection jumped significantly after the announcement by the Fed. The spike in reelection odds is the largest since the death of Osama bin Laden in May of last year.
According to intrade.com, President Obama now has over a 66% chance of winning the election this November, an increase of over 5% since the QE3 announcement. With such a dramatic move in reelection odds, the news of new quantitative easing is certainly a blow to the Romney campaign and a major reason why Mitt Romney has publicly said he would not reappoint Chairman Bernanke if given the chance.
Chart Source: www.intrade.com, 9/17/12
Amy Magnotta, CFA, Brinker Capital
Last Friday’s disappointing employment report raises the odds of more quantitative easing by the Fed. Payroll employment increased by only 96,000, and the increases reported in prior months were revised lower. The unemployment rate fell, but only due to a decline in the labor force. The labor force participation rate has fallen to 63.5%, the lowest level since September 1981. With GDP growth of just +1.7%, the U.S. economy is not growing at a pace sufficient to create needed job gains. The chart below shows just how weak job creation has been compared to previous recoveries. (Bureau of Labor Statistics).
This employment report did not offer the Federal Reserve evidence of a “substantial and sustainable strengthening in the pace of the economic recovery” that they are seeking. As a result, the odds that the Federal Open Market Committee (FOMC) will announce further easing at their meeting on September 12/13 have increased. Consensus seems to expect additional easing, and a lack of announcement to that effect could disappoint the markets. There has been talk of an open-ended buying program of U.S. Treasuries and/or mortgage-backed securities. The FOMC could also extend their rate guidance, perhaps pledging low rates into 2015.
Inflation remains within the Fed’s target level, so they still have room to ease; however, the effectiveness of further monetary policy easing is diminishing. While the Fed feels obligated to act to fulfill their mandate of economic growth, the bigger problems facing the U.S. economy – the fiscal cliff, the Eurozone crisis and slower growth in China – are outside the Fed’s control. More certainty surrounding fiscal policy would allow businesses pick up the pace of hiring and investment, boosting economic growth
 Ben Bernanke, Federal Reserve Chairman.