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Who Can Save Obama: The Fed or the Tea Party?

Watching President Barack Obama’s body language when he went in front of the American people to talk about the compromise on the debt ceiling, it was clear he is not happy with the proposal, which he believes will avoid a damaging default.

Barack Obama
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Barack Obama

The Republican Party’s leadership is hailing the deal as a major victory which stopped the Democratic White House raising taxes while also not allowing a damaging default that could have been blamed on the Tea Party movement and the "Party of No." As House Speaker John Boehner put it, the deal isn’t the greatest, but lives up to the GOP's principles on taxes and spending.

Having failed to get any tax increases into the deal, President Obama will come under pressure from his own party faithful with just over a year before he goes to the polls hoping for re-election.

With the Republicans making it clear they will not allow the White House to pass legislation that will lead to higher taxes or lower spending on defense, one analyst told CNBC that if President Obama wants to get re-elected, he may need to push a plan to boost employment that will appall many in the Democratic party.

“Later in the year we could see the president forced to try and lower unemployment by cutting corporation taxes and removing the regulatory pressure on the corporate sector,” said Bob Parker, a senior advisor at Credit Suisse in London.

The prediction highlights just how difficult a position the president is in.

Having been forced into compromising with the Republican and Tea Party movement to get a deal on the debt ceiling, his opponents are unlikely to accept any other policies that don't play to their political agenda.

With the economic growth weakening in the second quarter and predicted to remain under pressure in the next few quarters, unemployment is unlikely to fall quickly enough to boost Obama’s re-election bid in 2012.

And with further stimulus spending effectively ruled out, the only significant help the president can expect will come from the Federal Reserve.

As Thanos Papasavvas, the head of currency management at Investec Asset Management argued in an interview with CNBC earlier this year, if the economy gets into trouble before the election, Obama can expect the Fed to come to his rescue with another round of money-printing.

While many believe both the first and second rounds of easy-money policy known as quantitative easinghave been largely ineffectual, the Fed has indicated it is ready to act if there is a noticeable deterioration in the health of the U.S. economy.

Friday will see the release of U.S. jobs data for July, and economists are predicting that just 100,000 jobs will have been created since the beginning of the third quarter, a number that if correct would do little to budge the unemployment rate back toward the 8 percent many observers say Obama needs if he is to win a second term in the White House.

It remains to be seen if the Fed could actually do much to influence the U.S. economy with another round of easing, a decision that could actually backfire politically given opposition to the Fed’s first two rounds of easing.

With no room to play with on fiscal policy, it could very well be the only card available to the Fed, and by extension the president.

If fiscal policy or the Fed cannot help the president his most bitter enemies might just offer him hope of re-election: the Tea Party. Having scored a major political victory, it will now feel emboldened and will be thinking long and hard about who they want to lead the Republican Party into battle with Obama at the end of 2012.

With John McCain calling the Tea Party faithful "hobbits," there is clearly a major division within the GOP. It would require a major shift in the U.S. political landscape for a Tea Party-backed Republican candidate to take the White House.

If the Republican center can't back its candidate, Obama could win another four years in the White House no matter how bad things get for the economy.

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