At the end of October, it is becoming increasingly evident that the U.S. economy is being pulled in several directions at once. Consumers are feeling increasingly confident, buying houses, automobiles and other items with cheap credit. However, businesses are growing increasingly defensive. Business fixed investment in the advance estimate of third quarter GDP declined at a 1.3 percent annualized rate. That does not happen in a healthy economy. Corporate profits are being challenged at businesses with significant exposure to Europe, and to a certain extent Asia as well. Real gross domestic product for the third quarter of 2012 increased at a tepid 2.0 percent annual rate. This was an improvement from the weak 1.3 percent real GDP growth rate of the second quarter, but still well below potential for the U.S. economy. Prospects for the current fourth quarter real GDP growth appear little better than for Q3. Concern about the Fiscal Cliff is growing and media attention is increasing, even as the presidential campaigns sprint toward election day. Once election fever breaks, all eyes will focus on Congressional action, or inaction, about the Fiscal Cliff. The Federal Open Market Committee issued a statement on Wednesday that did not include forward guidance about QE3. It is reasonable to expect that QE3, the $40 billion per month program of mortgage-backed securities purchases, will continue well into 2013. The end date of the now open-ended program will be influenced by what Congress does about the Fiscal Cliff. If we feel the full force of the tax increases and spending cuts as established by current law then it is reasonable to assume that the U.S. economy gets knocked back into at least mild recession in 2013. A rising unemployment rate through mid-2013 could keep QE3 engaged through the length of the year, and perhaps into 2014. However, a reduced, smoothed and/or delayed Fiscal Cliff could allow the Fed to end QE3 by mid-year 2013. Monetary policy beyond 2013 will be shaped by the presidential election. A Republican win would result in a new FOMC chairman in January 2014, and an opportunity for the Fed to change course. Even if President Obama is re-elected, Bernanke may step down in January 2014, as reported by the New York Times earlier this week. The Bernanke Fed has tried to reduce uncertainty about monetary policy, but that may be changing.
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