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Peter Schiff: The Fed Is Behind the Curve; Financial Conditions at Loosest Level Since 1994

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According to data compiled by the Chicago Fed, financial conditions have reached the loosest level in the US since January 1994. This despite Federal Reserve tightening over the last year.

On Nov. 10, the Chicago Fed National Financial Conditions index hit -0.93. As Peter Schiff pointed out in his most recent podcast, that was early on in the dot-com bubble. The Fed has been raising interest rates and talking about shrinking its balance sheet. Why is it that financial conditions are looser now then when rates were still at zero?

Peter said it’s because the Federal Reserve is way behind the curve.

Yeah, they’ve raised interest rates. But it’s too little too late. Even the official inflation rates have risen as much, if not more, than the rate hikes. Meanwhile, the stock market keeps going up. And now they do have the dollar going down. A weakening dollar actually adds to the loosening of financial conditions, which are obviously going to get a lot looser if the Fed doesn’t really start jacking up rates faster.”

This follows conventional wisdom. As the Financial Times reported, New York Federal Reserve head William Dudley said last month that the loose financial conditions could indicate the need for further Fed tightening.

When financial conditions ease—as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation.”

But Peter doesn’t believe that tightening is going to happen.

In fact, I think they’re going to get ready to cut rates again and loosen financial positions even further as the economy goes into recession, or relapses back into recession, which I said in my last podcast, I think we would have already been there had Hillary Clinton won the election. And since Donald Trump won and you have all this false optimism, it is dealying the onset of that recession for a year or two, but it’s not perventing it. So if financial conditions are this loose now, when the Fed is tightening, imagine how much looser they are going to get when the Fed is easing.”

So, what’s the problem? As the Financial Times pointed out, lax conditions – including low bond yields, tepid volatility, and tight credit – raises concerns that the Fed won’t be able to keep the economy from “overheating.”

As Peter said, the loose conditions make it extremely easy for companies to borrow money. This leads to malinvestment.

There’s cheap money. There’s money flying around -floating around. All kinds of crazy businesses can get funded.”

He talked at length about a company called MoviePass that allows subscribers to go to the movie theater as often as once a day. The pricing structure the company has in place is guaranteed to lose money in the long run.

The company is eventually going to go bankrupt. It’s only a question of when. But the fact that they’re even a company, the fact that they can even sucker investors into funding this, the fact that they’re there is the function of loose financial conditions. If this was a normal market with normal interest rates, there’s no way a crazy company like MoviePass could ever come into existence.”

Looking at the bigger picture, Peter said this is yet another reason he thinks the dollar is going to go down.

It’s going to go much lower because as I said, the rate hikes that the Fed delivered were too little too late. The dollar rallied on the anticipation of these rate hikes, but we never got enough hikes to justify rally. And of course, the hikes only sow the seeds of their own reversal, because eventually, the Fed has to reverse course and start lowering rates.”

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