With President Barrack Obama's winning the election, Democrats maintaining their control of the Senate and Republicans retaining the House, Bank of America Merrill Lynch analysts said that the return to status quo in terms of government leadership has significant implications for the financial markets and the U.S. economy.
In a report from the investment bank released after the President's win, the analysts looked at
When it comes to the fiscal cliff, BofA Merrill said that maintaining the status quo probably means all the political sides would see the voters as supporting their views, which means arriving at a compromise will likely not get any easier.
Furthermore, they said that divisions between the Republican House and Democratic Senate are still there. This means that negotiations regarding the fiscal cliff will be challenging and the business community's uncertainty can linger.
"We see the risk that we temporarily fall over the cliff to be larger than it would be under a Romney victory," analysts wrote.
They added that President Obama has asked for tax increases for the upper income cohort, which the Republicans objected to. If Republicans will not compromise, then the risk increases that Democrats will allow all tax cuts from George W. Bush's presidency to expire to push their "middle income tax relief" proposal.
According to Citigroup Global Markets analysts, the maintenance of the government leadership would mean that the same players remain in place for the upcoming fiscal cliff negotiations in the Congress' lame duck session. This means that a temporary compromise might not be reached prior to Dec. 31 or even sometime into the new session in January. Analysts said to stay tuned to statements from leaders from both parties in both houses of Congress, as well as the leaders of the Ways & Means and Finance Committees, since their "signals" matter most.
BofA Merrill analysts said an alternate positive, albeit unlikely, scenario would have the threat of expiration of all the Bush tax cuts will bring Republicans to the negotiating table. Then the positive risk scenario is for a bipartisan plan that would gradually fade in austerity instead of going over the cliff.This should set the stage for more meaningful tax reform during the next year or two, BofA Merrill analysts said.
The resolution on the fiscal cliff will influence the negotiation around the debt ceiling as well. If the negative scenario (a temporary fall off the cliff) happens, it will be harder to come to a compromise on the debt ceiling. This might result in a sovereign rating downgrade by one or more agencies.
There are also consequences in terms of the Fedl Chairman Ben Bernanke's term expires in Jan 2014. BofA Merrill believes President Obama would consider renewing his term. If Bernanke were to decline, analysts anticipate current Fed policy to continue under a similarly sympathetic Fed Chair such as Janet Yellen, who will serve as acting Fed chair anyway until Bernanke's replacement's confirmation. The Federal Open Market Committee's voting members will be "particularly dovish" in 2013, and BofA Merrill analysts think that the Fed will continue to make outright purchases worth $45 billion of Treasurys even post Operation Twist, which is set to end at yearend.
In terms of housing policy, BofA Merrill said that there is a chance that President Obama might appoint a new Federal Housing Finance Agency (FHFA) acting director during the recess period. This would be his chance to replace FHFA Acting Director Edward Demarco, who has been trying to curb the GSEs' presence in the mortgage market with someone who is more willing to implement more housing stimulus.
