Fed Has Created an Economic Hall of Mirrors (Video)

Jim Grant agrees with Peter Schiff that the Federal Reserve cannot continue to raise interest rates in 2016. On CNBC today, Grant explained his reasoning for why the Fed will regret raising rates in December and reverse its course of action:

It seems to me that the Fed is more likely to go to zero than to go to one-half of one percent from here. [I think that as the Fed] read the data, it felt it had to move. It had been saying for so long it would, [therefore] it had to, [and] it did. That doesn’t mean it was right to do so in the Fed’s own scheme of things. I think the Fed will regret the move it did in December. I think it will backtrack.”

Highlights from Grant’s interview:

“I think what they [the Fed] are going to do is not what people expect. I think that the shared wisdom is that 2016 will bring us 2, 3, or 4 one-quarter-of-one-percent rate hikes, leaving us at the end of the year at 1% or so in the Federal funds rate. It seems to me that the Fed is more likely to go to zero than to go to one-half of one percent from here. I think the Fed felt that through a combination of institutional self regard and as it read the data, it felt it had to move. It had been saying for so long it would, [therefore] it had to, [and] it did. That doesn’t mean it was right to do so in the Fed’s own scheme of things. I think the Fed will regret the move it did in December. I think it will backtrack. I think you will begin to hear speeches from various Fed personages saying that, ‘In the circumstances, we might well consider this. We think the data are not so friendly as they might be. We think that, blah, blah blah…’

“As we say on Wall Street, I think they missed their market… Let’s consider what these ultra-low rates do. They pull consumption forward. Car sales being a prime example. Lease terms have never been easier. It’s never been cheaper to borrow. It’s never been easier to arrange a subprime loan. So a lot of car sales in 2015 – that’s great, right? Well, it’s great until financial terms tighten and those cars can’t be sold. So these ultra-low rates pull consumption forward, and reciprocally they push into the background business failure, or the recognition of business failure, because everything is so easy to finance.

“So what I think we have in 2016 is a conjunction of weakened consumption, especially for cars, and the manifestation of business failure that was masked or shrouded by these ultra-low rates. The Fed has given us a kind of hall of mirrors. It has changed perceptions. It has changed the timing of cyclical events. But I think that ultimately markets out. The price mechanism finally is revealed to be the better allocator of resources than our Mandarins in Washington. I think the Fed, by necessity, will be forced to backtrack on this rate hike.”

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