| NEW YORK
NEW YORK May 13 The Federal Reserve has propped
up the U.S. economy several times since the financial crisis
struck, but many on Wall Street think the approach of November's
elections may make it hesitate to do it again.
Investors are weighing up the chances of more stimulus after
recent signs the recovery is flagging. Chairman Ben Bernanke has
said the Fed would take action if needed.
Still, with elections six months away and the Fed a regular
target of conservative candidates, some economists think the
central bank could be influenced by political considerations.
The Fed has over time established an arms-length
relationship with incumbent administrations to insulate itself
from short-term political pressures.
To be sure, most reckon the Fed would respond quickly to a
new emergency such as a sharp deterioration of Europe's debt
crisis. The question is whether it would hesitate in the face of
a less dramatic problem, such as a weakening labor market.
After two rounds of bond buying, the Fed has bought a total
of $2.3 trillion of Treasuries and mortgage-backed securities to
help keep interest rates low and encourage economic activity.
"The consensus seems to be pretty divided on this," said
Aneta Markowska, economist at Societe Generale. "Our take is if
they do something, they have to do it relatively quickly. We
would need to see a more meaningful deceleration in activity for
them to initiate something the closer we get to the election."
Brett Ryan, economist at Deutsche Bank, dismisses such talk,
saying the Fed will stringently adhere to its dual mandate. "The
trajectory of the labor market and inflation will tip the
balance in its decision making, regardless of timing around a
presidential election," he said.
A Reuters poll of the large financial institutions that do
business directly with the Fed showed how split market experts
are about any election effect.
Eight of 15 economists at primary dealers said the central
bank would not be at all swayed by worries about politics if it
came to undertaking more stimulus.
But economists at seven others said the Fed might hold off
on another round of debt purchases even if the economy continues
to have sub-par growth and unemployment remains high.
There are a total of 21 U.S. primary dealers.
The Fed has four more policy meetings before November. Some
economists see the window of opportunity for more stimulus
narrowing after the next gathering, June 19-20.
"That is the perception on Wall Street, that the window for
action closes with the June meeting," said Michael Feroli, chief
U.S. economist, at JPMorgan.
The Fed's current stimulus program, "Operation Twist,"
extends the maturity of the Fed's securities holdings to lower
long-term interest rates such as those on mortgages. It is due
to last through June.
"If the outlook worsens sufficiently ... I don't think
politics would keep the Fed from easing," said Benjamin Reitzes,
senior economist at BMO Capital Markets.
"However, if the decision to ease is a marginal one, the
fact that it's an election year could keep them sidelined a
little longer than otherwise," he said.
Michael Hanson, economist at Bank of America Merrill Lynch,
said the Fed has tended not to relax monetary conditions close
to presidential elections.
President George H.W. Bush was disappointed that then-Fed
Chairman Alan Greenspan did not cut interest rates more
aggressively in the lead-up to the 1992 elections. Bush lost the
presidency to Bill Clinton.
"I reappointed him and he disappointed me," Bush said of
Greenspan in an interview aired in 1998.
Bernanke's Fed announced its second round of bond-buying -
$600 billion of longer-term Treasuries - on Nov. 3, 2010, one
day after midterm elections.
The move came as no surprise, however, as Fed officials,
including Bernanke, had signaled the Fed was prepared to go
ahead with more measures to help growth.
Jacob Oubina, senior U.S. economist at RBC Capital Markets,
said the Fed probably did not take the midterms into account
then. "But now everybody is talking about it, if they will
influence the election by engaging or not engaging in a QE3
program," he said.
The bar for any new Fed program looks high. The U.S. economy
has shown signs of recovery, albeit an anemic one, and some Fed
officials are adamant there is no need for further stimulus.
Also, political pressure on the Fed has rarely been higher
as Republicans and Democrats spar over the best way to
kick-start economic growth and reduce unemployment and huge
budget deficits, said Allan Meltzer, a Fed historian and
professor at Carnegie Mellon University.
"There have been some exceptions, but they are usually very
careful to try not to be accused of taking action for political
reasons, and especially now when Republicans in Congress are on
their back, they are pretty conscious of that risk," he said.
Alice Rivlin, who was Vice Chairman at the Fed when Democrat
Bill Clinton ran as the presidential incumbent and won i n 1996,
said as a general practice there is no consideration by central
bank officials of politics.
"I think the Fed is aware it is an election year obviously,
but would not pay much attention. If anything they would lean
over backwards not to do anything which could be interpreted as
playing a role in the election," sh e said.