The Fed Blinks: Tightening Financial Conditions Will Derail Rate Hike Expectations (Video)
Today, the President of the Federal Reserve Bank of New York admitted that tightening financial conditions could affect the Fed’s “monetary policy decision.” In his February Gold Videocast, Peter Schiff translates William Dudley’s statements: the Fed is not going to be able to keep its promise of raising interest rates four times throughout 2016.
In fact, Peter believes the US is heading into an official recession and that monetary policy will loosen – not tighten – this year. He argues the Fed will soon follow the lead of the Bank of Japan and the European Central Bank by lowering interest rates into negative territory. Meanwhile, gold has risen more than 6% in 2016 and is up about 8% since its dip following the Fed’s December rate hike.
Follow along with the full transcript.
Today is the day the Fed actually blinked. William Dudley, who is the president of the Federal Reserve Bank of New York, admitted today that the Fed is concerned about the tightening financial conditions that they are now observing since they hiked rates. And of course, the irony of that statement is the Federal Reserve is directly responsible for the very conditions that now concern it. But what’s important is that this is really the first official acknowledgment that the Fed is backing away from its supposed commitment to raise interest rates four times in 2016.
In fact, most people don’t believe that they’re going to raise rates four times. There are still people who believe that maybe they’ll raise rates once or twice. Of course, I don’t believe they’re going to raise rates at all. I have always believed that the rate hike that we saw in December was not the beginning of a tightening cycle, but the end of the tightening cycle that began with the taper talk about two years ago. And I always knew that if the Fed raised interest rates, the whole bubble that they inflated would begin to deflate. And that is exactly what the Federal Reserve is observing. And now the Fed has been forced to admit that, and I think there’s a lot more coming when it comes to admissions.
In fact, we got more economic news today on the service sector, the ISM numbers coming in way below estimates, which is confirming what I’ve been saying all along, that this recession is not contained to manufacturing, that it includes the service sector as well. And in fact, I think the service sector is actually in worse shape than the manufacturing sector. And during this recession, which I believe is already underway, and I believe eventually the government will acknowledge that this greater recession began in the fourth quarter of 2015, the very quarter that the Fed chose to raise interest rates. I think by the time it’s done, it’s going to be the service sector that’s going to be in the worst shape.
And you know, the comments today from the Fed sent the dollar tanking. It lost about 2% of its value across the board today against all the major currencies. And in fact, Dudley acknowledged that he was concerned about the strengthening dollar. The dollar is actually at the lowest it’s been since October of last year. The dollar is lower than it was when the Fed hiked rates. So really what’s concerning the Fed is not the strength of the dollar, but the weakness in the stock market, the weakness in the high-yield bond market. And look at the financials.
You know, even though the Fed tried to throw the market a bone today with these dovish statements, it caused gold prices to go up. Gold prices broke out above $1,140. We’re up to maybe about $15 bucks on the day as I speak now. This is the high that I’ve seen so far. Gold prices are now up about 9% since the low that it made the day after the Fed made the mistake of hiking rates. We’re now up 9% from that point.
So while the Fed’s statements were great for foreign currencies, great for gold, oil prices, too. Crude’s up $2 on the day. Remember, you have so many people who think that all the market needs is an increase in the price of crude. But the market is still tanking. The NASDAQ is down about 80 points as I’m recording this.
But the real carnage is in the financials. All of the big banks are making 52-week lows today. Many of these banks are down about 50% from their highs. They’re headed for their 2008, 2009 lows. And remember, all these banks that were too big to fail when we bailed them out are now much bigger and they’re going to fail again, especially if the Fed continues with its rate hikes, which is another reason why it’s not.
In fact, not only do I think the Federal Reserve is not going to raise rates any more, but they’re actually going to lower them. And they’re not going to stop at zero. We already have the Bank of Japan now with negative rates. They joined the ECB. The Fed’s going to be next. And I think in this interest rate limbo, how low can you go? I think we’re going to go the lowest. I think we’re going to have the biggest negative number of any of the major central banks. And we’re also going to launch QE4, and it’s going to be bigger than ever. Why does it have to be bigger than ever? Because the problems that we had in 2008 that led to the financial crisis are also bigger than ever.
See, everybody has made the mistake of believing that the Fed’s medicine worked, that they cured the patient. And now because the patient is healthy, it no longer needs the medicine. Well, that’s not true. The economy is sicker than ever because the medicine was toxic. And because the medicine didn’t work, we’re about to get an even larger dose of it. Because the government is never going to admit that they’ve got it wrong, that they basically threw gasoline on the fire. They’re going to put more gasoline on that fire and try to convince us that it’s going to go out. So this is going to be the biggest monetary stimulus ever, but everybody is prepared for the exact opposite outcome. The world has been betting for years that the US dollar would keep rising, interest rates would keep rising because the US economy had a legitimate recovery. Well, when we relapse back into a bigger recession, I think this recession is going to be a greater recession than the Great Recession that we escaped from 2009, 2010.
Then the dollar is going to tank because we’re going to have even more aggressive monetary stimulus this time around than we had before. And Wall Street is all levered up. In fact, one of the big trades going on right now is all the hedge funds have shorted the Chinese yuan because they assume that China’s going to have to break its peg, not only with the yuan, but with the Hong Kong dollar. Well, I think these hedge funds are about to lose a tremendous amount of money on that bet, because I think the real move in the yuan is going to be higher, not lower, and the same thing with the Hong Kong dollar. Everybody is prepared for the wrong outcome.
And as far as gold is concerned, this is a real breakout. This is the highest the price has been since the Fed hike. We’re at the highest we’ve been since October of last year. We’re getting a real confirmation in the gold stocks, which are very forward looking. There are many gold stocks today that are up 8%, 9%, 10%, or more. Wall Street is so under-invested in this sector because everybody has believed this false narrative. And now finally people are starting to question the legitimacy of that narrative. But there’s a lot more questions that are going to be asked, and people are going to be very shocked when they find out the answers. Because the truth of the matter is, we’re in worse shape than we’ve been.
Ben Bernanke’s book that he wrote, which I’ve always said should have been in the fiction section and shouldn’t have been titled “The Courage to Act,” but “A Coward’s Way Out.” We’re going to find out that the last chapter, which wasn’t written, is the one where the whole house of cards that he erected came tumbling down because he didn’t save us from anything, and neither did Janet Yellen. Everything that those two have done has just worsened all the problems, but people were oblivious to it as long as we were operating under the delusion of the stimulus. And as long as we have the strength of the dollar, we can continue to borrow money to pay for imports, we can continue to go deeper and deeper into debt. But the minute the illusion runs crashing into reality and people recognize the situation that we’re in, that we didn’t have a legitimate recovery, that we just had a bubble, and rather than higher interest rates and a real recovery, we’re back in a recession, and the Fed is going to have to try its hardest to blow more air into this bubble. It is not going to work.
And this collapse in the dollar today is just the beginning. The dollar has a long way to fall. Not only does it have to reverse all of its ill-gotten gains, but it has a long way to go beyond that. Because the problems for the dollar, the fundamentals for the dollar have gotten worse the entire time the dollar was rallying. And it’s this phony rally in the dollar, it’s this false belief in a higher dollar and higher interest rates that have wreaked havoc with the emerging markets, with emerging market currencies, with commodities. And all of these markets are going to be able to breath a huge sigh of relief as the Fed backs away from these rate hikes, and the dollar begins to tank.
But probably the biggest beneficiary of the Fed’s new easing, this new easing cycle that I think is about to begin, is going to be gold. Gold has fallen for the last few years based on this false belief that everything is great and we’re going to have a return to normalcy, and the Fed’s going to shrink its balance sheet. Nothing could be further from the truth. The balance sheet is about to blow up. We’re going to go up to $10 trillion. The national debt just surpassed $19 trillion officially. It’s going to be $20 trillion by the time Barack Obama leaves office, maybe more. He’s doubled the national debt. The next president is going to have to double it again in order to keep this house of cards from collapsing. I think it’s impossible to finance that type of growth in debt. But that’s what this bubble economy needs because all of our GDP grows based on debt. It’s not real economic growth; it’s just consumption that’s borrowed. And you need to borrow more and more money to get less and less GDP growth, and we’ve run to the point where we can’t do it anymore.
The world is not going to continue to give us a pass, and so gold prices, I think, are going to take off. I think the correction from this long-term bull market is over, and I think gold’s going to make new highs. And of course, if gold’s going to make new highs, so is silver. And so silver might even be a better buy than gold, because silver corrected a lot more during the correction, and so it has a lot more lost ground to make up for.
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