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Peter Schiff: Jerome Powell Engaging in “Open-Mouth” Operations

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The Federal Reserve followed its script yesterday and raised interest rates another 25 basis points. But the central bankers did surprise some people by hinting at just two more hikes this year. Analysts have been fixated on the possibility of four 2018 rate increases.

The Fed’s slightly more dovish tone on rate hikes sent gold climbing. The yellow metal gained about 1% in the aftermath of the FOMC meeting.

Nevertheless, even while dampening expectations of faster tightening, the Fed continued to talk up the economy. In fact, the central bankers project continuing rate hikes all the way into 2020. In his most recent podcast, Peter said the Fed sounded even more optimistic about the economy than it has in the past. He called it “all politics,” designed to maintain the illusion that everything is great.

Powell was up there trying to talk up the US economy because that’s exactly what his boss, Donald Trump, wants him to say, and so he’s being a team player.”

Powell even went as far to say that the outlook for growth has been improving “in recent weeks.” But as Peter pointed out, it’s actually been the opposite. Remember several weeks back when the Atlanta Fed was predicting something like 5.4% GDP growth for Q1? In contrast, the figure it released late last week was a paltry 1.8%.

Those are the same weeks where Powell is saying that the economic outlook has been improving. How is it improving when you have a collapse from expecting 5.4 to expecting 1.8?”

And it’s not just the Atlanta Fed. All of the investment banks have ratcheted down growth forecasts in the last several weeks. Peter said Powell’s comments are just nonsense. He’s talking up the economy because he wants everybody to continue believing everything is great.

He’s trying to use open-mouth operations to talk up the economy and talk about how good it is and how much confidence the Federal Reserve has in the economy, which again I think is the principle reason that they continue to raise rates – because they want to pretend they’re still confident.”

During the Q&A portion of Powell’s press conference, the new Fed chair said he not only expects stronger economic growth, he also thinks unemployment will continue to fall and inflation will remain tame. He justified this projection simply based on the fact unemployment has dropped over the last couple of years with little inflation. Peter said he thinks Powell is going to go 0-for-3 on these predictions, and that the Fed chair is ignoring the differences between now and then.

As unemployment was coming down back then, the dollar was going up. We had this huge rally in the dollar. We also had a big collapse of commodity prices. Oil prices came way down. So, that was helping to contain inflation. Even as the unemployment rate was falling, you had this downward pressure from commodity prices and a rising dollar. And part of that was the shrinking budget deficits that created confidence that the US economy was going to rebound, that the dollar was going to be strong. So, all of this helped keep the inflationary forces at bay. None of that is true today. Everything is the opposite.”

Peter said there is a lot of upward pressure on price inflation that the Fed is simply ignoring. Oil is up. The dollar is down. We have the twin deficits in the federal budget and US trade.

So, the Fed is completely wrong to be so sanguine about inflation, simply because we didn’t have it in the past to just conclude we’re not going to have it in the future. I guess they never heard about that saying, ‘Past performance is no guarantee of future success.'”

Another reporter asked Powell if he was concerned rising interest rates would have an adverse impact on the overall economy. He said he wasn’t worried because we have the strongest economy we’ve had in 10 years. Peter pointed out that might not be so comforting, considering 10 years ago was the beginning of the financial crisis. Everybody was talking up the economy then too.

If we have the strongest economy we’ve had in 10 years, why would you take comfort in that? Because 10 years ago, everything imploded. And the reason that everything imploded, or the catalyst, was because we had all this debt and interest rates had been rising, and it was the higher rates that we had 10 years ago that was the pin that pricked the bubble and caused everything to implode. Well, the same thing is happening now, except we have even more debt.”

Peter said there is no way to know if the Fed is putting on an act to keep people believing in the economy, or if the central bankers are really as optimistic as they claim. He leans toward “clueless.”

If this guy [Powell] had good enough sense to understand all the problems, the guy couldn’t sleep at all. He’d be tossing and turning. The fact that he’s sleeping like a baby  – either it’s because he’s completely clueless and has no appreciation whatsoever about what’s about to happen, or he knows it and doesn’t even care. I think it’s more the former than the latter. I think he’s very very confident … I mean he is completely clueless. He has absolutely no idea what’s about to happen.”

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