The Republican takeover of the House and some big gains in the Senate will put the heat on the Fed over its ultra-loose monetary policy.  We wrote about the hard money bias of the new Republican leaders several weeks ago.  Rand Paul’s landslide victory to replace Jim Bunning will send one of the Fed’s most outspoken critics to the Senate to compliment his father, Ron Paul, in the House.  If you think Jim Bunning’s Fed “chin music” was nasty, just wait until Rand Paul takes the mound!   This is from his website,

With so much blame going around for the current financial crisis it is surprising that so few in the mainstream press have discussed the role of the Federal Reserve System. For too long the Federal Reserve has operated behind a shroud of mystery—as Senator I would make sure that all Americans understand the dangers of unsound monetary policy and shed light on this secretive organization.

It it will interesting to see if the FOMC is influenced by today’s election results. The NY Times wrote a few days ago,

Criticism of the Fed has been more of a simmering undercurrent in this election cycle than a dominant theme, even for insurgent candidates. But Fed officials, who try to avoid public discussion of electoral politics, have become increasingly attuned to the probability that their critics will have a louder voice in the next Congress.

Clearly today’s election was a referendum on large budget deficits and should be good for bonds in the short-term.  If the Fed now senses the political winds and trims the sails of QE2,  we will see a nutcracking short squeeze in the dollar.   Stay tuned!

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