Impact of Fed Policy on Upcoming Elections

English: President Barack Obama confers with F...

English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

Are we poised for a “good-news-could-be-bad-news” economy?

According to POLITICO the answer is yes. As Ben White reports, the Federal Reserve’s next move will “have an enormous impact on the economy and political landscape for the 2014 midterms and 2016 general election.”

While many experts view the Labor Department’s report last Friday – which showed the U.S. added 195,000 jobs in June – as an indication of a growing economy, some analysts fear it will cause the Federal Reserve to taper down its stimulus efforts too quickly, leading to a possible economic downturn.

Up until now, Chairman Ben Bernanke “has kept the Fed’s target for short-term interest rates at effectively zero” through “buying up huge amounts of treasury bonds and mortgage debt.” But in previous weeks, the leader of the central bank signaled plans to gradually slow the Federal Reserve’s bond-buying program starting as early as September, depending on the health of the economy.

If the central bank “pulls the plug too quickly,” POLITICO reports, then “it could send interest rates soaring and tip the economy back into recession.”

POLITICO contends the central bank’s policies could mean trouble for candidates in the upcoming 2014 midterm and 2016 presidential elections. “We already saw the tremendous volatility in the stock and bond market last month when there was just a little verbal evidence from Bernanke that the Fed might be moving sooner rather than later,” said Bill Galston, a Brookings institution scholar and former member of the Clinton administration. “But the Fed could also guess wrong and that bad guess could be the frame for the entire 2016 campaign,” Galston continued.

Depending on the Federal Reserve’s timeframe for reigning in its quantitative easing program, says POLITICO, its actions could strip “Democrats of one of the advantages they have in the 2014 midterms and make the environment much less hospitable to Hillary Clinton or any other Democrat who hopes to succeed Obama in 2016.”

POLITICO calls the current economic circumstances “uncharted terrain” for the Federal Reserve and noted that “the ingredients are there for potential disaster” given that the bank “never engaged in the kind of bond-buying it conducted following the financial crisis and subsequent recession.”  Moreover, “Bernanke is almost certainly departing early next year, leaving the wind-down to an untested successor.”

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