Obama: Will He Twist Again?

The monetary policy implications of the US election cannot be underestimated, in particular whether the US is able to avoid falling into the so called ‘fiscal cliff’ and ultimately avoid another recession. If Romney had won, his nominated Chairman would almost certainly be more hawkish than Bernanke and the tone of the Fed’s whole approach would have reflected this. But President Obama’s re-election means that Fed Chairman Bernanke will probably be reappointed in 2014 when his term comes to an end. This means that monetary policy in the US will remain highly accommodative in the 2013 forecast period (and indeed stretching out all the way to 2015 if Ben Bernanke is reappointed in 2014).

It’s common knowledge that due to sluggish growth in the US economy the Fed pursued a course of quantitative easing. QE1 came about in March 2009 and proved to be a great success. QE2 was implemented in October 2010 to much less success, but enough to egg Bernanke on to another round: QE3. These actions were in part given confidence when the first two full rounds of quantitative easing went by without any notable inflationary pressures, as was widely feared, apart from through the boost to asset prices.

Operation Twist was a part of this quantitative easing and instituted in two parts. The first ran from September 2011 to June 2012, and involved the redeployment of $400 billion in Fed assets. The second will run till December 2012, and encompass a total of $267 billion.

So, how will Obama’s re-election impact QE3 and Operation Twist?

“The current program of MBS buying is already much smaller than previous rounds of QE, and will probably not get much higher even if Operation Twist is replaced by Treasury buying at the end of the year,” says Tim Fox, head of research & chief economist, Emirates NBD.

QE3 will also have much less impact in terms of depressing the USD than QE1 or QE2. This is because the US is no longer alone in pursuing a course of quantitative easing, and – in contrast with other countries –  the US economy is already looking a bit stronger than the rest, reducing the risk of extended QE.

What impact will an effectual US monetary policy have on the GCC?

“As far as the US election outcome is concerned I would say that President Obama’s victory represents a vote for continuity,” says Fox. “This means that the GCC can probably draw reassurance that monetary policy will remain stimulatory for a few more years at least, given the regions’ currency pegs to the USD. In turn this environment should help to nurture the strong recoveries in the region that are already underway.”