FOMC Meeting: Yellen Follows Her Script

The December Federal Open Market Committee meeting went pretty much according to scrip.

Analysts widely expected the Fed to raise rates by .25. It did. Analysts also expected the Fed to signal three more hikes in 2018. It did that too.

Gold went up, as we said it probably would, hitting a one-week high in the wake of the rate hike as investors “bought the fact.”

This was the fifth rate hike over the last two years. The current interest rate now sits in a range between 1.25 percent to 1.50. That means it’s taken two years for the Fed to nudge rates up by a modest 1.25%. Historically speaking, interest rates remain extremely low, as Peter Schiff noted in his most recent podcast.

This is an extraordinary amount of excess monetary stimulus. To say that the Fed has been successful in normalizing rates is complete nonsense. Two years ago, when the Fed raised rates for the first time, nobody in the mainstream believed that two years later we would still be this low.”

Gold Newsletter editor Brian Lundin told MarketWatch the FOMC basically “straddled the line between the doves and the hawks – noting how inflation has remained persistently and confoundingly low, but that economic growth remains sufficient for the central bank to plan for more rate increases in 2018. Not surprisingly, gold’s reaction has been positive …, and that’s precisely what I expect, as the record of the last two years shows that year-end rate hikes have served as launching pads for big rallies in gold.”

As usual, the post-FOMC press conference focused in on inflation. As Reuters put it, “Yellen said the persistent shortfall of inflation from the Fed’s 2% goal was the major piece of ‘undone work’ she was leaving for Powell to figure out.”

Peter noted that Yellen always frets about inflation being too low. Nobody ever raises questions about what will happen if inflation suddenly surges higher.

It never dawns on anybody to actually consider the real risk. The real risk is not that inflation stays below 2%, I mean, that’s the ideal situation for the Fed. The risk for the Fed is that inflation goes to 3% or 4%. But that possibility isn’t even discussed. I mean, I know why, because they can’t deal with that, because what would they do? I wish somebody would ask Yellen, ‘What is your plan. What are you going to do if inflation surprises you by spiking up? What if it jumps to 3 or 4%?”

Of course, a surge in inflation would require the Fed to hit the accelerator and push interest rates up much faster. That would certainly pop the stock market bubble and the bond bubble. This is not a scenario Yellen wants to contemplate.  As Peter said, the Fed is scared to death reality will call its bluff.

The worst thing for the Fed is that inflation shoots above 2% to the point where now they have to prick their own bubble. Now they have to raise interest rates and everything comes collapsing. So, since that’s what they’re so afraid of, they never want to discuss that. They want to keep everybody’s attention on this phony problem of inflation being too low so they can focus on the goal of having more inflation instead of talking about what they’re really worried about – inflation running out of conrtrol.”

One reporter brought up the bloated stock market, asking Yellen if she was concerned about extraordinarily high asset prices. She said she didn’t see any flashing red lights. She doesn’t even see any flashing yellow lights. In fact, the Fed chair said there’s nothing to worry about because “it is different this time.”

This also follows the script. The central bankers always promise that the results of their actions will be different this time around. There won’t be any bursting bubbles because they have it all figured out.

So how are things different today than in, say, 2007?

Yellen said things unraveled last time because there was too much debt. She said we don’t have that today. Peter took issue with Yellen’s assessment.

Is she kidding me? We actually have more debt. We are more deeply indebted now. This is a bigger bubble that has been fueled by even more cheap money. The Fed is force-feeding money into the economy. Interest rates are still at 1.3%. We’ve been going on a borrowing binge. Corporations are levered up. They’ve been buying back stock. Consumer debt is at an all-time high – credit card debt, auto debt, student debt. Government debt is exploding. The national debt is twice as big as it was when we had the 2008 financial crisis.  And Yellen is saying there’s nothing to worry about because there’s no debt? Because there’s no excessive borrowing?”

We’ve reported extensively on the ballooning debt. And it’s not just us. Last month, Bill Blain of Mint Capital said, “The truth is in bond markets. And that’s where I’m looking for the dam to break. The great crash of 2018 is going to start in the deeper, darker depths of the credit market.”

So, this week’s FOMC drama pretty much followed the script. That’s not good news when you read all the way to the end of the story.

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