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Bernanke Is Losing His Chance to Ease Before Election

A sudden upturn in US economic datais putting Ben Bernanke in a difficult position.

Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the Senate Budget Committee February 7, 2012 on Capitol Hill in Washington, DC.
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Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the Senate Budget Committee February 7, 2012 on Capitol Hill in Washington, DC.

The improvement means the Federal Reserve chairman can’t garner the support for an aggressive ‘QE3’ until December, economists say, leaving him powerless until then if the gains prove temporary and the stock market plunges.

And a falling market into November could cost President Obama the election and, in time, cost Bernanke his job under Romney and Ryan, who have both been vocal critics of the Fed chief.

“The chance for FOMC action post strong retail salesis much diminished,” said Robert Savage, chief executive of research site Track.com. “If the S&P 500rolls over to 1280 or lower, then Obama is at risk. And if Mitt Romney is elected, he likely will not reappoint Bernanke.”

The S&P 500 is up 11 percent since early June after a strong July jobs report earlier this month and a better-than-expected retail sales report this week. But Savage and other investors worry that this rally could be at risk heading into September, just at the wrong time for Obama and Bernanke.

After Bernanke’s symposium at the end of this month in Jackson Hole, Wyoming, the Fed’s next official policy announcement is scheduled for Sept. 13.

“We believe it has become increasingly possible that the Fed waits until December for confirmation of the slowing economy and completion of operation twist,” wrote economists from Bank of America Merrill Lynch this week, citing the recent strong data. This sentiment was echoed by economists at Goldman Sachs on Wednesday.

The next scheduled Fed policy decision on the docket is Oct. 24, just two weeks before the November election. It’s been an unwritten rule over the years that this meeting is off limits for any major policy action on fear it would bring a political firestorm on the Fed, an organization that is supposed to be independent.

So that leaves Bernanke with the Dec. 12 policy statement as his only option left to save the day if the market starts falling back at the end of the year.

Romney’s recently selected running mate, CongressmanPaul Ryan, has been a vocal critic of Bernanke’s policies, saying they could one day spark rampant inflation.

“I’d be looking for somebody new,” said Romney at a Republican Presidential debate last year in response to a question about Bernanke. The Chairman’s second term is up in 2014.

Still, some traders won’t totally rule out a move by Bernanke at the September meeting, even with the recent strong data. Europe and a tenuous employment picturemay still justify stimulus before the election.

“The Fed definitely acts in September as the election will politically prevent him from acting in October and I don’t think he (Bernanke) wants to risk waiting until December,” said Peter Boockvar of Miller Tabak. “The doves in the Fed are ready to go. I don’t agree that they should act at all, but think they will anyway.”

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