A Whole Lot of Talk, No Action at the Latest Fed Meeting

The Federal Reserve wrapped up its July meeting on Wednesday. Once again, there was a whole lot of talk and no action.

The Fed kept interest rates at zero. The Fed kept its quantitative easing program rolling. The Fed didn’t do anything. But the Fed had plenty to say.

Peter Schiff summed it up this way in a tweet.

The most important aspect of today’s FOMC announcement on interest rates is the press conference that follows. That’s because Fed policy is now defined by words, not action. As the US economy is now too leveraged for the Fed to actually tighten, all it can do is talk about it.”

As far as the economy, the Fed said it continues to strengthen. But despite this somewhat optimistic outlook, Powell said the central bank is nowhere near hiking interest rates because it hasn’t seen “substantial” progress.

Our approach here has been to be as transparent as we can. We have not reached substantial further progress yet. We see ourselves having some ground to cover to get there.”

In other words, rate hikes still aren’t on the Fed’s radar. Schiff said when it comes to rate hikes, the Fed doesn’t even own a radar screen.

CNBC interpreted the Fed’s notation that it sees “progress” toward its goals “as a nod that changes to policy, particularly regarding the monthly bond purchases, could be on the way.” A PNC economist told CNBC, “The Fed has started the tapering clock.”

In other words, the mainstream remains convinced a rollback of quantitative easing is imminent and the central bank is close to cutting back on its asset purchases.

But note the Fed isn’t actually tapering anything. It didn’t announce tapering in the future. In fact, Powell flat out said no decision has been made on the timing of tapering. Meanwhile, the Fed balance sheet grows to a new record week after week.

Nevertheless, a lot of mainstream pundits still think the word “progress” in the FOMC statement hints at some future policy change – maybe. But this leaves an important question unanswered. What exactly is “substantial” progress? That term remains undefined. Schiff said it can’t be defined and that’s the whole point.

No matter how much progress is made, it won’t be substantial enough to actually prompt the Fed to tighten monetary policy. Any progress made will be lost if the Fed tightens.”

That’s the big problem facing the central bank — it can’t tighten monetary policy. As Schiff pointed out, any tightening will pop the bubble and deflate the so-called recovery.

Those who think the Fed’s current ultra-easy monetary policy makes no sense given the current state of the US economy don’t really understand the current state of the US economy. The US economy is a gigantic bubble and even the tiniest of Fed tightening pins will prick it.”

On inflation, the Fed continues to insist rising prices reflect “transitory factors.” The wording in the Fed statement was exactly the same as the June meeting. Powell said he has “confidence” in the medium term that inflation will move “down,” and as the economy continues to reopen, inflation will “fall away.”

But Powell did reassure us that if inflation does prove to be significant and “materially” above its 2% goal, the Fed will use its tools to guide inflation back down. Of course, “materially” is another term with no definition. Schiff said the time for the Fed to use its tools has long passed. CPI has already pushed too far above 2% to get it back to that level.

In his discussion on “transitory” inflation, Powell made an admission that should raise eyebrows. (It won’t, but it should.) Powell said “transitory” means that recent large price increases will stick, but that future price increases will revert back to 2% per year at some unknown point in the future. In other words, when you hear the word “transitory,” don’t think that means you’re going to get some price relief down the road.

In a nutshell, this Fed meeting was substantively like the last few – meaning there was no substance.

For all the talk, the Fed hasn’t done anything. The exceptional monetary policy the central bank launched more than a year ago at the onset of the coronavirus pandemic remains fully in place. As prices keep rising, Powell keeps insisting it’s all transitory. But the very policies the Fed insists must remain in place until we see “substantial progress” are helping drive the transitory inflation. There’s a disconnect here the mainstream still can’t seem to see.  What will happen when they figure it out?