It’s amusing to see all the conspiracy theories surface regarding Obama’s recent summoning of Yellen for a meeting in the Oval Office. For example, Jim Rickards’ (from the Daily Reckoning) recent blog post was typical:
Late last night it was revealed that President Obama has summoned Janet Yellen to the White House today.
There’s nothing unusual in itself about the president meeting with the Chair of the Federal Reserve over lunch to discuss policy. Bush 43, for example, frequently met with Alan Greenspan to discuss the economy.
But this meeting is different…
This isn’t a casual lunch. It’s a high-profile, last-minute meeting Obama orchestrated. The last time something like this happened was in 1951, when Harry Truman summoned the entire Federal Reserve Board of Governors to the White House. Since this is something that hasn’t happened in almost 70 years, today’s meeting is a fairly extraordinary event.
By bringing her to the White House, Obama is sending Yellen a highly visible public message. Don’t raise rates. You can consider this meeting more like an implied threat.
Rickards was actually pretty tame compared to ZeroHedge’s dredging up Johnson era Federal Reserve intimidation comparisons:
… in 1965, President Lyndon B. Johnson, who wanted cheap credit to finance the Vietnam War and his Great Society, summoned Fed chairman William McChesney Martin to his Texas ranch. There, after asking other officials to leave the room, Johnson reportedly shoved Martin against the wall as he demanding that the Fed once again hold down interest rates. Martin caved, the Fed printed money, and inflation kept climbing until the early 1980s.
“I hope you have examined your conscience and you’re convinced you’re on the right track.” Lady Bird Johnson said to William McChesney Martin, on his arrival at the LBJ ranch.
Call me naive, but I give Obama much more credit. If his goal was to get Yellen to keep rates low, do you really think such a public display would be the most efficient method of achieving this? I don’t buy that for one second. If anything it makes it more difficult for Yellen to err on being easy. The Federal Reserve has to maintain the illusion of being independent, so by threatening that concept with such a public display makes no sense. Far more effective would be a secret message delivered by someone close to the President.
So if the President wasn’t trying to influence Yellen to keep rates low, what was he doing? Maybe there is some truth to the White House’s line that “they discussed both the near and long-term growth outlook, the state of the labor market, inequality, and potential risks to the economy, both in the United States and globally.” That is certainly one possibility.
But if that were the case, why did Obama ask Biden to also sit in? We all know how Biden’s meetings go…
There must be a reason both the President and Vice President wanted to meet with the Federal Reserve Chair. At first I thought it might be bad news about some sort of banking calamity overseas, but I realized there is no way Biden would be invited to that meeting, nor would it be requested by the President. No, bad news would have been the result of Yellen asking for the meeting, not the other way round.
The more I thought about it, the more convinced I became the meeting request from the President was not some strong arm technique, nor was it was financial disaster planning for some looming terrible event. And then it hit me. I don’t have much to back up this theory, but I think it makes more sense than anything else I have read.
Obama and Biden met with the Yellen to plan some sort of massive student loan aid plan. Not sure what it will look like exactly. It might be a certain amount of forgiveness, or maybe it will be a pledge to lower rates on student loans to levels equal to more secure borrowing. But I think the Democrats are planning a big program to give themselves an upward push with the younger voters this November.
Obama has already taken the first step in this direction (from MarketWatch):
Hundreds of thousands of student loan borrowers will now have an easier path to getting their loans discharged, the Obama administration announced Tuesday.
The Department of Education will send letters to 387,000 people they’ve identified as being eligible for a total and permanent disability discharge, a designation that allows federal student loan borrowers who can’t work because of a disability to have their loans forgiven. The borrowers identified by the Department won’t have to go through the typical application process for receiving a disability discharge, which requires sending in documented proof of their disability. Instead, the borrower will simply have to sign and return the completed application enclosed in the letter.
If every borrower identified by the Department decides to have his or her debt forgiven, the government will end up discharging more than $7.7 billion in debt, according to the Department.
I am not sure what this will mean for the markets, but I wanted to throw it out there as my best guess for the unusual Fed Chair meeting at the White House.
Thanks for reading and have a great weekend,