Peter Schiff Podcast: Markets Ignore Fed President’s One and Done Admission

St. Louis US Federal Reserve President James Bullard recently suggested the Fed is likely to maintain its strategy of small, incremental rate hikes for the next few years. This includes one likely December hike and then only one or two more for the next several years. Bullard estimates rates to stay at .68% through 2019.

Given the market’s penchant for overreacting to any change in Fed policy, there was surprisingly little response to Bullard’s comments. In fact, gold seems to be rising along with the likelihood of a December rate increase. In his latest podcast, Peter examines Bullard’s predictions from the perspective of what it would mean for one of the longest and slowest recoveries since the post-war era.

Highlights from the show:

The odds of a December rate hike continue to ratchet up. We’re now back above 70%. We had a parade of Fed officials, most recently again today, coming out and talking about why a December rate hike is a good idea, probable, possible, appropriate. You name the adjective, some Federal Reserve president, governor is discussing it.

The markets are ratcheting up their expectations. The dollar index continues to move higher, we hit about a 9-month high today. We got above 99, but we didn’t close there. In fact, the dollar index managed to close down a notch today. Interestingly enough, gold had a pretty strong day today.  We’re up around $10. I think we’re at $1,273 in the price of gold.

Even if the FOREX traders are worried about a December rate hike to the extent that they think it’s negative for foreign currencies, the gold traders don’t seem to care about how a rate hike might impact the price of gold because the price of gold is rising even as the probability of a December rate hike is rising. This suggests either the gold traders don’t believe those numbers and they feel that a December rate hike is not coming, or they’ve correctly concluded that even if the Fed does raise interest rates in December, it’s no big deal.  It’s too little too late to be a negative for the gold market. The Fed is going to deliver far less than it promised when it comes to rate hikes.

In fact, the most interesting comment by a Fed official came last week … from St. Louis Fed President James Bullard. He said that the Federal Reserve only needs to nudge interest rates up by 25 basis points.

Right now, the official rate of Fed funds is between .25 and .50. It used to be between 0 and 25. I think where we actually are right now is 38 basis points. So if we moved up .25 (at least these are the numbers Bullard is throwing out), we’d move up to .63 basis points for the Fed funds rate, which is just barely above a half point.

He says that all we need to do is nudge it up to .63 basis points, and that’s it – we’re done. He said, “We need to do it in December, but then that’s it, interest rates are going to stay really low for years.”  He’s talking 2 or 3 years or maybe more of ultra-low interest rates, despite whatever is happening in employment, and inflation. This is all we need. Nudging up by a quarter basis point and we’re done.

I was surprised, to be honest, that we didn’t get more of a reaction to this admission by Bullard that the next hike, if it comes in December, is the end of it. If that’s it and then we’re on hold for years, obviously, sometime over that period of time, we’re going to find ourselves back in recession.

Remember, this is the third longest recovery of the post-war era. It is the weakest recovery ever, and it has the most stimulus of any recovery ever. So despite having the most stimulus, it’s the weakest, and it’s one of the longest. Clearly, it’s going to run out of steam eventually if it hasn’t already happened.  So if the Fed does in fact raise rates ever so slightly in December and then say: “That’s it for a while. We’re just going to wait.” What’s going to happen is we’re going to be back in recession.

If Hillary Clinton becomes the next president … she’s going to try and stimulate the economy … The new president wants to come in and try to boost things up because they want to get re-elected. Of course, the Federal Reserve is going to want to help the newly elected Hillary Clinton. So, the markets have to start pricing in the easing cycle.

Every time the Fed says “We’re going to be lower for long,” that is really the equivalent of an easing of policy. You are reducing the expectations for future rate hikes. I do expect that if the Fed follows through with a December rate hike … they will adjust their estimates of where rates are going to be in the future … to show that the Fed believes interest rates will be lower for longer despite the fact that they just raised them.

The Fed can’t really raise rates. They’re only raising rates slightly to prove that they can, but they’re not raising them enough to make a difference, at least a sharp difference in the short run. We have so much debt that even these itsy bitsy rate hikes are doing damage to this bubble economy and air is escaping from this small hole that has already been put there. Nudging rates up even a little bit more is going to make that hole even bigger.

Get Peter Schiff’s latest gold market analysis – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!