Recent QE3, imminent fiscal cliff and presidential elections to restrict Fed action in October

It seems that after announcing QE3 last month and with the US presidential elections just around the corner and fiscal cliff woes increasing as the end of the year approaches, the FOMC will most probably be inclined to stay on hold in October and closely observe the situation.


This view is shared by all of the analysts contributing to the special forecast report. Adam Narczewski believes that the Fed "will not make any nervous moves" this month as it needs time to assess the impact of the recently introduced QE3 and other experts agree with this opinion.

Not all of them however consider the presidential elections, which will take place on November 6, as an important factor preventing the FOMC from modifying its monetary policy. Even though the majority would see Fed action as inappropriate at this point, Alexandra Estiot suggests that "the Fed acts despite politics" and that their decision to remain on hold in October would be motivated by other reasons.

The most important would be the already mentioned recent introduction of the open-ended third round of stimulus. The other one is the so-called fiscal cliff, a set of tax hikes and spending cuts, which will come into effect at the end of the year. In the opinion of Yohay Elam "the big decisions will probably wait for the end of the year, when the extension of Operation Twist expires, and when Congress is expected to reach a deal on the fiscal cliff." Steve Ruffley also expects "a general observation regarding the fiscal deficit (...) within the context of the future health of the economy and business decisions regarding investment."

The Fed monetary policy decision will be announced on October 24 at 16:30 GMT. Below you will find full forecasts of the contributing economists:

Steve Ruffley – Owner of

Steve Ruffley "The Fed will and must remain on hold. They will maintain it's stance of promoting growth through existing QE3 measures, whilst still maintaining the core integrity of the Fed. It may also look at additional innovative measures to increase the liquidity and availability of credit to businesses. It will not do anything that is seen as politically motivated and recent comments within the Fed have been guarded toward the inflationary impact of QE3.

A general observation regarding the fiscal deficit will be made but within the context of the future health of the economy and business decisions regarding investment, but that will be directed at Congress, not the Presidential candidates."

Alexandra Estiot - Senior Economist at BNP Paribas:

Alexandra Estiot "The Fed acts despite politics. This does not mean that it keeps on hold when Election Day approaches, but that its decisions are taken in line with its dual mandate of stable prices and maximum employment. In the past, the Fed has been accused of playing for or against the incumbent President. This is non-sense. But still, it probably leads monetary policy makers to some cautiousness… Being cautious is not really something that Chairman Bernanke allows himself to be. We do expect the Fed not announce anything on October 24th, but because QE3 was decided on September. Since then, data point to a very fragile improvement in economic conditions, way insufficient for the Fed to alter its monetary stance. The economy is unlikely to markedly strengthen as long as the fiscal cliff is resolved, so the Fed is likely to just keep going. However, by the end of the year, FOMC members will have to announce the amount of MBS they intend to buy as Operation Twist will come to an end and thus the cash from selling short-date securities will dry up. As for now, QE3 is not that successful in lowering mortgage rates, as some issues are beyond the Fed’s powers, such as the lack of competition between originators, or warrantees asked and fees charged by Agencies. Whether this will lead the Fed to inject more cash in the system and or to try another pipe is an open question."

Talal Abdullah - Financial Analyst at

Talal Abdullah "The FOMC on Wednesday, 24th will likely keep the benchmark interest rates unchanged at exceptionally low levels between 0.00 – 0.25 percent.

The Fed monetary policy meeting is scheduled only two weeks before the presidential election, and for sure the FOMC will remain on hold for now, most probably until the Congress deals with the 'fiscal cliff'. The Fed wants to see the nation`s unemployment rate around 7% before the bond purchases end, and around 6% before the FED starts raising interest rates again and with the fiscal cliff an imminent pressure, failure from Congress to address the issue will likely push the economy back in recession and accordingly keep the Fed on full defense to help the economy.

Expectations are the FED’s latest quantitative easing program, which has been announced in September, could continue until middle of 2015 and could reach in total $2 trillion. I do believe that the Fed will keep the rates near zero at least until mid-2015 to support economic growth, as long as the inflation levels remain subdued, noting that the latest QE announced by the FED pumps enough money into the economy and lowers mortgage rates, could lead to more spending as well as more hiring by businesses."

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

Adam Narczewski "After the introduction of QE3, Fed will not make any nervous moves. The only choices the U.S central bank has right now is either to keep or increase the amount of QE. Recent macro data is not bad so any additional measures at this point of time will not be taken. The next meeting is close to the presidential elections in the U.S, but the Fed is looking at the big picture. I do not believe in rumors or statements that the Fed might be helping Obama to get reelected. The fiscal cliff is a real problem that the Congress has to deal with and for sure the FOMC will observing the outcome of that. Summarizing, since the macro environment improved recently, I do not expect the Fed to increase the amount of QE on their next meeting. If the global situation worsens, then we should expect more action."

Nicky Ong - Co-Founder of Traders Corner:

Nicky Ong "The upcoming FOMC Monetary Policy Meeting is unlikely to yield any surprises as the Federal Reserve not only wait on Congress to address the looming Fiscal Cliff, but will be inclined to assess the impact of QE3 before acting again.

On top of introducing another round of quantitative easing, the Fed moved from the end of 2014 until mid-2015 its conditional expectation it will keep short term rates effectively near zero at their last meeting.

With this in mind, and no real change in the U.S economy apart from a decline in the Unemployment Rate, the Fed will almost certainly adopt a wait and see approach to future monetary policy."

Yohay Elam - Analyst at Forex Crunch:

Yohay Elam "The Fed is likely to refrain from any big moves on its October meeting. The main reason is the big decision taken in September: QE3 / QE-infinity has just begun and the Fed isn't likely to move before giving enough time to analyze the impact. The second reason is the upcoming elections which are just too close. In addition, some recent economic indicators have improved. The big decisions will probably wait for the end of the year, when the extension of Operation Twist expires, and when Congress is expected to reach a deal on the fiscal cliff. The fiscal cliff is taking its toll due to the uncertainty it creates, but it's hard to believe that the politicians will leave the situation unchanged - a deal will is expected in the last moment."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

Ilian Yotov "With the Fed already committed to an open-ended QE, there will be no need for a change of its existing monetary policy at the October meeting. The only changes in the near future will likely be adjustments in the amount of asset purchases- more QE if economic conditions deteriorate, and vice versa. But with the recent U.S. labor market and other data showing some optimistic signs, and the presidential election around the corner, the Fed will be in no hurry to rush into any such adjustments. The Fed will probably confirm its commitment to keep rates low until 2015 and to do more QE if necessary, but the meeting will not be likely to deliver anything that we didn't already know..."

Dr. S. Sivaraman - CEO and owner of

Dr. S. Sivaraman "This time before the US presidential Election the FED is not expected to bring in any change in the policy. FOMC announcement may bring in subdued moves in the market.

The EURO and GBP are expected to swing and firm up during that time frame."

Bill Hubard - Chief Economist at

Bill Hubard "After last month’s launch of QEIII and extension of the rate pledge, we do not expect any major decision by the FOMC at the 23rd-24th October meeting.

However, we do think that the FOMC will take further action in the coming months. Keep in mind that last month’s additional monetary policy stimulus was caused by the weak momentum of the economic recovery. But at the start of 2013, the economy is facing the 'fiscal cliff'. This confluence of the expiration of the Bush tax cuts, the end of the payroll tax break and the start of the automatic spending cuts will deal another blow to the economic recovery. Post-election negotiations between Democrats and Republicans are expected to scale down the size of the 'fiscal cliff', but there will remain a substantial negative fiscal impulse. This may be the trigger for the FOMC to provide additional monetary stimulus beyond what was decided in September.

Most likely, they will announce purchases of longer-term treasuries beyond 2012, as Operation Twist terminates by the end of the year. Probably unsterilized, because the Fed’s stock of short term Treasuries will be close to 'nil point' by then. In fact, that would be a continuation into 2013, of the simultaneous purchases of agency MBS and longer-term treasuries that we are going to see for the remainder of 2012, but without any sterilization. The next meeting of the FOMC in December AFTER the Presidential election on 6th November seems to be the logical launch platform, because Operation Twist terminates at the end of the year.

Although the rate pledge was extended to mid-2015 at the September meeting, many FOMC participants would like to replace the calendar date with numerical thresholds for unemployment and inflation that would induce the Fed to keep the fed funds target rate at exceptionally low levels. However, they need some time to work out the specific numbers and the way they are going to communicate the thresholds to the public, according to the minutes of the last meeting. Because of the communication issues, it would be sensible to announce this at a meeting that includes a press conference. The first is in December, the next in March."

Alberto Muñoz - Forex Analyst at

Alberto Muñoz "It looks clear that the Fed will remain on hold for now, as new monetary policy measures with elections round the corner would be considered as innappropriate. Anyway it looks interesting to analyze what the situation will be after presidential elections: the Federal Reserve has been warning U.S. politicians against allowing the legislated tax increases and spending cuts to take effect (known as 'fiscal cliff') up to now. But, at the same time, Bernanke is buying bonds and keeping short-term interest rates at zero until the economy recovers. So, in practice, the Fed is offering to finance any deficit the U.S. government chooses to run at almost no cost.

Knowing this, why worry about the 'fiscal cliff'? Regardless who wins the elections, the most likely outcome is that fiscal tightening will be postpone and politicians will start negotiating a long-term program of gradual fiscal consolidation as the Fed has removed the threat of higher interest rates, so the costs of postponing fiscal tightening have vanished."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.