Voters weren't thinking about monetary policy when they voted on Tuesday, yet the Federal Reserve had a key role in the presidential election—possibly even a decisive one.
Exit poll results show that, not surprisingly, a majority of voters said the struggling economy was their top concern. Yet Republican challenger Mitt Romney's strategy of hammering President Barack Obama for his spotty handling of the economy obviously didn't work. In the end, voters seemed to believe the economy was gradually getting better, and Obama deserved more time to make things right.
The economy has been up and down all year, yet Obama enjoyed a subtle lift from positive economic development during the final weeks of the campaign. I tracked these changes in detail through the U.S. News Obamanometer, which analyzed nearly two dozen economic indicators on a daily basis to determine whether trends favored Romney or Obama. In mid-September, they favored Romney, largely because job numbers were weak, gas prices were high and the stock market was erratic. But by Election Day, the needle had firmly moved to Obama's side.
So what changed? Without question, the biggest factor impacting the economy this fall was the Federal Reserve's decision in September to extend its controversial quantitative easing program indefinitely, until the economy is back on track for good. This type of monetary easing is an arcane strategy that doesn't directly impact consumers. But it can have a powerful effect on the economy that filters through to ordinary people in many important ways. And the biggest advocate of quantitative easing has been Fed Chairman Ben Bernanke.
In general, under quantitative easing, the Fed buys high volumes of low-risk bonds, which reduces their supply and forces investors to put their money into riskier assets such as stocks. Among other things, this tends to boost stock prices—since there's more demand for them--while pushing down long-term interest rates.
Both of those things have been happening. The stock market has risen by about 12 percent so far this year, with much of that run-up coming in late summer, as investors correctly anticipated the Fed's September move. Stock prices have basically been flat during the fall, but that's pretty good considering that many big firms reported weak third-quarter earnings. Many analysts think the Fed's action has basically put a floor under stocks, bringing a bit of stability to a very jittery market.
Long-term interest rates are at record lows, which is finally starting to help stimulate important types of spending. Home sales have been picking up, with prices firming after six years of declines. Car sales have been surprisingly strong, with more buyers qualifying for loans and taking advantage of low rates to splurge on features. There are still a lot of problems—such as potential home buyers who can't get approved for a loan—but these parts of the economy are steadily improving.
A lot of voters don't necessarily benefit from a buoyant stock market, or low interest rates for car and home purchases. Election Day exit polls made it clear that many voters are still suffering and can't afford niceties such as a new car. But steady improvements in the stock market, the housing market and retail spending contribute to the general sense that things are getting better. Meanwhile, people who do have investments or own homes start to feel better off, and spend more. When demand goes up, companies hire more, and jobs start to feel more secure.
Consumer confidence, in fact, rose sharply in the weeks leading up to the election, even as business leaders were becoming more worried about problems such as the looming fiscal cliff. That's one thing that pushed our Obamanometer reading onto Obama's side. The Fed probably had as much to do with that as anything else.
Bernanke is a declared Republican, and he was first nominated to be Fed Chairman by President George W. Bush in 2006. There's no reason to think he favored Obama over Romney, or pushed policies meant to aid Obama's reelection. But Bernanke has also shown himself to be a pragmatist determined to do whatever is necessary to help the economy recover today, even if it risks unpleasant consequences—such as higher inflation—in the future. Voters seem to approve. So maybe the politicians ought to listen.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.