There seems to be an assumption that is held by a large number of people that the Federal Reserve tampers with its monetary policy prior to an election in order to juice the economy. I have heard people say that they don’t expect a crash until after the election because the Fed won’t let it happen.
While I can’t say for certain that this hasn’t happened in the past, I don’t believe it is necessarily true. Making this assumption could really guide someone the wrong way.
The Federal Reserve is a political organization. Its website ends in “.gov”. While the Fed is certainly there to benefit the big banks, it is also there to benefit big government and deficit spending. It has a monopoly on the production of dollars, which we must use in many cases because of the legal tender laws. In addition to all of this, the Fed chairman is nominated by the President and confirmed by the Senate.
While the Fed is a political organization, I’m not sure why people would think that it has to favor the incumbent. The Fed is in bed with the establishment, not any one particular party or incumbent. Why would Bernanke and the Fed care about saving Obama for re-election when the alternative is Romney? Does is really make any difference? If anything, the establishment might actually prefer Romney at this point. Obama seems to be overplaying his hand lately with comments about businessmen not really building their own business. Obama is so philosophically wedded to big government, he is giving it a bad reputation. The establishment might prefer someone like Romney who talks about capitalism and entrepreneurship, because they know his policies will still favor the establishment.
Now, if Ron Paul were the Republican nominee, then certainly Bernanke and company would be doing everything in their power to get Obama re-elected. If they had to triple the money supply again just to get things looking good before the election, they would do it. But since that is not the scenario, the Fed and the banking establishment don’t really care about Obama.
The current Fed policy proves that they don’t care about Obama winning again. The adjusted monetary base has been flat for over a year now, since QE2 ended in June 2011. If the Fed really wanted to cause an artificial boom prior to the election, they aren’t doing a very good job of it now.
I think another interesting point in all of this is to look at the past. Paul Volcker came in as Fed chairman in 1979 and threw the hammer down. He stopped the printing presses and let interest rates rise well into the double digits. This sealed the deal for Jimmy Carter. Volcker’s policy brought about a deep recession. He was not concerned about Carter winning his re-election. He was concerned about saving the dollar. This was in spite of the fact that Carter nominated Volcker to his position. It just shows that not even the president is really running the show.
I would not time your investments based on the election. If you think there will be a stock market crash, I wouldn’t wait until after the November election to sell. There is a lot of concern building that higher taxes will really hurt the economy in 2013. These are expiring tax cuts and new ones from Obamacare. When you couple this with the flat monetary base, there is certainly reason to be concerned about trouble in the short term. Regardless, I wouldn’t count on the Fed going to QE3 just because Obama needs a boost. They might do it for other reasons, but it won’t be for Obama.