RPT-INVESTMENT FOCUS-What if a post-election Fed were shackled?

(Repeats without changes from Friday)

By Mike Dolan

LONDON, Oct 5 (Reuters) - Investors staring squarely at theU.S. fiscal cliff may well be ignoring a bigger monetary policypitfall.

Many asset managers are puzzled at the how little attentionworld markets seem to have paid to the U.S. Republican party'sstiff criticism of the hyper-active Federal Reserve and itssuccessive bouts of reflationary money printing since 2008.

Given the scale of support the Fed - along with the EuropeanCentral Bank, Japanese and British central banks - continue toprovide global asset prices, then it's remarkable how littlemarkets have been ruffled by next month's tight election race.

This past week's first of three U.S. presidential debates wasa starting gun for a month of intense electioneering that is atleast starting to focus minds on how markets may behave aroundthe Nov. 6 poll.

To date, most of the talk has been how quickly the nextpresident and new congressional constellation can dodge thelooming "fiscal cliff", where $600 billion in spending cuts andexpiring tax relief - some 4 percent of U.S. output - kicks inautomatically next year without a wider budget agreement.

But with such an agreement as dependent on the makeup of theHouse and Senate as the occupier of the White House, thisbudgetary uncertainty has been parked in "watch, wait and see"mode" until the election outcome becomes clearer.

The running assumption is that one form of 'gridlock'prevails and a deal gets thrashed out in time. On balance, thepolls point to incumbent Democrat Barack Obama retaking thepresidency, Republicans the House, and the Senate up for grabs.

But if Republican challenger Mitt Romney's strong showing inthe first debate on Wednesday night translates into opinion pollgains both nationally and in key swing states, then the prospectof a "clean sweep" for Republicans may have to be priced intomarkets rather quickly.

That could well have profound impact on everything from the'fiscal cliff' resolution and growth outlook to equity sectorslike pharmaceuticals, wary of a rollback of Obama's healthcarereforms. But upshot of sometimes bitter Republican criticism ofthe Fed is potentially even more disruptive for world markets.

Republicans have long argued that five years extraordinaryFed policies ultimately threaten future inflation and abetprofligate spending in Washington.

Romney has vowed that if elected he would not renominate Fedchief Ben Bernanke, himself a Republican, to a third term.

And Romney's running mate Paul Ryan is an even harshercritic, backing legislation that would open up the Fed'smonetary-policy decisions to congressional scrutiny and stripthe central bank of its mission to seek full employment.

Given that the longevity of the Fed's third round of assetpurchases last month is tied explicitly to cutting the joblessrate, that's a particularly controversial stance going forward.

"If Mitt Romney is elected as the next president there isgoing to be a phase during which investors are going to beconcerned that he might remove Ben Bernanke from the Fed," saidYves Bonzon, chief investment officer at Swiss asset managerPictet, which has over $300 billion in assets under management.

"And if that happens, if Romney is elected, you want tohedge all dollar-debasement trades. That includes gold, the S&P500, carry trade currencies etc," Bonzon said

REINING IN THE FED

A removal of long-term inflation-risk may be welcome forsome but a likely attendant lurch lower in Wall Street stocksand inflation-linked Treasury securities, spikes in long-termTreasury and mortgage borrowing rates and a potentiallyexport-sapping surge in the dollar may be too hard to swallowfor any new government.

The impact on international markets could arguably be largergive dollar-printing has been widely cited as buoying everythingfrom global commodity and food prices to emerging market bondsand currencies.

Curiously, Reuters latest monthly poll of fund managersworldwide showed opinion split evenly on whether a Romney orObama win would be good for world markets. About three quartersof U.S. funds said a Romney win would be best, while a similarshare of European funds said reckoned Obama's re-election wouldbuoy markets most.

One of the reasons for market nonchalance so far is thatmany believe pre-election attacks on the Bernanke Fed are justbluff on the hustings. Faced with the market implications ofshackling the Fed at such a sensitive time, they would like backdown when in office.

But unless a new administration's stance was clarifiedquickly, there could be considerable speculation anduncertainty.

"A clean sweep (for the Republicans) would lead to marketturmoil as they quickly tried to work out the implications of avery different policy approach on a whole set of fronts," saidAndrew Milligan, head of global strategy of the multi-asset teamat Standard Life Investments in Edinburgh.

Latest US opinion polls:World markets after Fed QE1/2:Equities after QE1/2 bouts:Global assets YTD in 2012:Reuters Sept funds poll:

(Graphics by Scott Barber; Editing by Jeremy Gaunt)

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