Barack Obama‘s decisive victory over Mitt Romney in the presidential elections has cemented the future path of monetary policy under Ben Bernanke. After unveiling a fourth round of long-term asset purchases, or quantitative easing, and a new threshold-based guidance, the Federal Reserve has put itself on a path of unlimited purchases of Treasuries and residential mortgage-backed securities (RMBS) until the unemployment rate falls. The FOMC’s natural rotation will only strengthen the Chairman’s control of the committee, while an Obama Presidency and a Democratic Senate guarantee a continuation of current policies, either under Bernanke or Vice Chair Janet Yellen.
Thus, interest rates will remain repressed through 2013, the U.S. dollar should depreciate moderately, and stock markets will continue to receive masses of liquidity.
Bernanke and several of his central bank colleagues around the world have unleashed a new era of monetary policy, marked by zero-bound nominal interest rates coupled with unprecedented and massive balance sheet expansion. In this post-financial crisis world, the Fed has taken a Keynesian edict and turned it on its head: instead of the government stepping in after a crisis to make up for the loss of aggregate demand from the private sector, it has fallen to central banks.
Through that process, the Federal Reserve has become the most important market participant, flooding markets with liquidity and owning more than a third of the Treasury market by the end of next year, according to Barclays’ economics team. The latest iteration of their asset purchases, or QE4, consists of $40 billion a month in RMBS purchases and $45 billion in unsterilized Treasury purchases, meaning the Fed’s balance sheet will grow at a rate of $85 billion until the Fed sees a substantial improvement in labor markets.