How the Federal Reserve Could be Key to the US Election

Last week it was revealed that President Obama has summoned Janet Yellen to the White House.

There’s nothing unusual in itself about the president meeting with the Chair of the US 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 US 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.

Why did Obama order the meeting? There are a few factors to consider…

Number one, Obama does not want the Fed to raise rates. If the Fed remains on its path of interest rate hikes this year, it would give the Republicans the strongest chance at the White House in this fall’s US election. That’s because rate hikes would likely lead to recession, and that would bode poorly for the Democrats.

Obama is deeply concerned about his legacy, which the Republicans would like to reverse. So the best chance the Democrats have in the upcoming presidential election is if rates stay low. Janet Yellen herself is a Democrat, with a background as a labour economist and a career at UC Berkeley.

She’s not necessarily hostile to Obama’s message.

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.

There are two openings on the Fed’s Board of Governors. Obama could nominate two of Yellen’s biggest policy opponents if he wanted to play hardball with her. Those two opponents could fight Yellen at every turn and threaten her control.

Or Obama could no nothing if she confirms, and let her maintain control of the board. He’s very cleverly held the vacancies open, which he can use as leverage to influence Yellen’s course of action.

He can nominate her worst opponents if she doesn’t follow his wishes.

There’s also another factor at play: The Democrats are as afraid of Bernie Sanders as Republicans are of Donald Trump. Sanders has won seven straight primaries and caucuses. One of his biggest weapons is his bashing of the big banks, Wall Street and his criticism of Hillary Clinton for being in their pocket.

Sanders has demanded that Hillary release the transcripts of her three speeches to Goldman Sachs, for which she received US$675,000. She has refused to release those transcripts. That’s the Achilles heel of the Clinton campaign, and Sanders is making the most of it.

Obama has no control over Trump. But he does exercise a lot of power over Sanders. One way the Democrats can damage Sanders is to pre-empt his populist anti-banker position.

Obama can pressure Yellen to address something the progressive element of the Democratic base considers a major issue: excessive compensation for banking executives. That would remove one of Bernie Sanders’ major campaign issues.

The Fed has a lot of power over how the banks are run, even if they don’t always have specific statutory authority. For example, they may tell a bank they feel its CEO is being paid too much money. Now, the Fed doesn’t have the explicit power to regulate CEO compensation. But if the bank doesn’t act on the Fed’s ‘suggestion’, the Fed might deny the bank’s next application for an acquisition, or to open another branch. Or they might just sit on the application.

I’ve been an attorney for firms on the receiving end of this practice. I’ve witnessed it firsthand. The US Federal Reserve has very powerful tools it can use to control banks, even though they might not have explicit statutory authority. Going after the banks in this fashion will inoculate mainstream Democrats against the Sanders’ critique.

Beyond these two implications, there’s something else about Obama’s meeting with Yellen that is potentially significant…

Present at the photo-op session will be Vice President Joe Biden. Biden has been featured a lot in public recently. He was at the Oscars, which 80 million people watched. He also went to Israel recently to meet with Netanyahu, after which he went to Jordan to meet with King Abdullah.

This is important because the Clinton candidacy could be in trouble — Hillary could be indicted for sending sensitive emails over non-secure channels when she was Secretary of State. And the Democrats don’t want to nominate Sanders. Joe Biden could be the Democrats’ backup plan if Hillary is forced out.

I’m known mainly as an economist, but I’m also an attorney. It looks to me like Clinton is facing criminal jeopardy for her actions. Many experts don’t expect her to be indicted, but her candidacy could be derailed even if she isn’t.

Cheryl Mills has been Hillary Clinton’s closest aide for the past 20 years. Huma Abedin has been another close assistant for the past 10 years. It looks both these women are going to be questioned by the FBI about what they know. If I was their lawyer I’d advise them both to plead the Fifth Amendment.

They can request immunity, but it’s too late for that. They can also try to talk themselves out of trouble, but they’d be setting themselves up for what’s known as a ‘perjury trap’. The FBI may have done 100 interviews of other people to learn specific details about one aspect of an investigation.

Then, they’ll casually ask someone about one bit of information they already know. If you give one inaccurate statement, they can then charge you with perjury and threaten you with prison time.

That’s why their lawyer will likely advise them to plead the fifth.

But just imagine the political fallout from the headline, ‘Top Hillary Clinton Aides Take the Fifth Amendment in Criminal Investigation’. That could very well sink her.

The conclusion is simple: It’s not necessary to indict Hillary to derail her campaign. They may indict her. But there’s a lot of bad news coming her way soon that might make it a moot point. That would probably torpedo her candidacy. This is the main reason Joe Biden has been so visible lately. The Democrats want to give their backup candidate greater public exposure. If Hillary can’t win the nomination, having a contingency plan will make it easier for them to deny Sanders.

From a market perspective, we are looking at unprecedented political volatility in both parties. I just explained what the Democrats are potentially facing. On the Republican side, there’s a concerted effort to derail Trump, which could cause a rupture between party leadership and its voting base. Republican leadership could deny Trump delegates, bypass Ted Cruz, and nominate establishment favourite Paul Ryan. That could lead to a civil war within the party.

One thing markets don’t like is uncertainty. And market uncertainty cannot be divorced from political uncertainty.

It’s going to be an interesting summer.

Best wishes,

Jim Rickards

James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Port Phillip Publishing. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

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