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Peter Schiff: The Average Consumer Isn’t Going to Be Comfortable with Higher Inflation

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The Federal Open Market Committee met last week. As expected, it left interest rates unchanged. But the FOMC made an interesting comment that indicates that it may be willing to “tolerate” higher inflation.

That might be all well and good for central bank policymakers, but just how willing are you to “tolerate” higher inflation?

In a statement, the FOMC said “Inflation on a 12-month basis is expected to run near the committee’s symmetric 2% objective over the medium term. The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.”

As Peter Schiff noted in his most recent podcast, up until last Wednesday, the Federal Reserve was concerned there wasn’t enough inflation and the goal was to get it up to the 2% target. Now the Fed is saying it’s there, but they expect the rate to actually go above 2% and they’re OK with it.

What they mean by symmetrical is that inflation was below 2%, at least the way they measure it. It’s probably always been well above it. But let’s just look at the government statistics … which is all they really care about. We had inflation of 1.4, 1.5, 1.6, right? It was always below 2 by a bit. So, now what they’re saying we can have some symmetry on the upside, meaning, ‘Alright, well, we can have two-and-a-half, because two-and-a-half and one-and-a-half, the average is two.’ And so what the Fed is really saying is their goal is not to have 2% inflation. Their goal is to have inflation that averages 2%.”

In other words, since we’ve had inflation below 2% for so long, we could theoretically have inflation the same amount above 2% for just as long and everything would be fine because it averages 2%.

What they’re really doing, and I’ve been saying this all along, I mean for years and years – they’re actually lifting their inflation target. Because it’s not 2% anymore. It’s actually somewhere above 2% so that we can just create a 2% average over a long period of time.”

Consider how much the cost of living has gone up even while inflation was under 2%. What is it going to look like when the Fed lets it go above their 2% target?

This talk of “symmetrical” inflation is a way for the Fed to hold back on rate hikes and keep the easy money spigot open. It’s also good news for the corporate world, not to mention the government. Inflation is bad for lenders, but it is a boon for borrowers. Companies are leveraged up with debt, so higher inflation rates coupled with a less aggressive Fed is good news for equity traders. As we’ve been saying for months, the economy simply can’t handle higher interest rates. With talk of symmetrical inflation, the Federal Reserve now has an excuse move forward on a more dovish path.

Peter also pointed out that the Fed didn’t mention economic growth. They came about as close to saying growth is slowing as you’re going to get from the central bankers.

So basically, what the Fed is saying is inflation is going to be above 2%. We’re no longer worried that it’s below 2%. It’s going to be above 2% and we’re OK. We’re not going to feel like we have to rein it back in. The Fed doesn’t want the markets thinking that if inflation is 2.2, 2.3, 2.4, 2.5, that the Fed is going to actively try to reduce it back down to 2. So, they’re acknowledging higher inflation. They’re also acknowledging less growth.  What’s that? That’s stagflation.”

San Francisco Fed President John Williams said he was OK with inflation rising “modestly” above the 2% target. Of course, we’ll never get a definition of “modestly” but Peter said no matter how high inflation gets, the Fed isn’t going to do anything, because it can’t do anything. It can’t raise rates more aggressively because of the fragility of the economy and its dependence on artificially low interest rates.

Williams also said he was “comfortable” with inflation over 2%.

Well, that’s great. It’s fantastic that John Williams is comfortable with inflation over 2%. I don’t think the average American consumer is going to take much comfort in know that his cost of living is going to be rising even faster in the future than it has been in the past.”

This whole podcast is definitely worth a listen. Peter also broke down the latest market news and April jobs numbers.

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