QE Delay Risks Turning Fed Into A Political Football

Another Ben Bernanke performance in front of the US Senate momentarily caught the attention of financial markets yesterday, up until the point when it became clear that the Fed wouldn’t be liquoring up the joint with more QE just yet. Despite the litany of bad economic stats in the US over the last three months or so, Bernanke noted that “we haven't really come to a specific choice at this point” (regarding more stimulus), though he commented that “we are looking for ways to address the weakness in the economy should more action be needed."

Over at The Big Picture blog, Peter Boockvar summed up the state of play regarding the Fed and “QE3” well, prior to Bernanke’s testimony:

...As long as cheap money/QE remains in the psyche of most of our current Fed members, including the Chairman, as the answer to any economic downturn, its use will always be a possibility with only the pain threshold that triggers it being the question. Today we’ll get a sense of Bernanke’s tolerance for what’s clearly a slowing in growth. If Bernanke doesn’t give the market what it wants today, the ensuing market selloff in the context of a fragile economy will just clinch an eventual QE program [sic].

In light of Bernanke’s refusal to pour the markets another drink just yet, it’s worth adding that the political risk associated with QE3 is growing. The next two Fed policy meetings will be held on July 31-August 1 and September 12-13; if more easing is not forthcoming by this second meeting then the Fed risks getting dragged into the mud bath that is the presidential election campaign.

If it continues to sit on its hands and do nothing while the money supply contracts and the economy heads south, then Democrats may attack it as an intransigent agent of moneyed, Republican Wall Street interests (1896 all over again). On the other hand though, if it chooses to do QE3 too close to November’s elections, then Republicans may see it as a measure designed to boost Obama’s fortunes in the nick of time.

So if the Fed is concerned about party political neutrality, then it would surely be better off acting sooner – and thus erring on the side of caution with regards the economy – than waiting.