St. Louis Fed President Comes Up With Another Excuse to Stop Raising Interest Rates

It looks like the Federal Reserve may have another excuse to slow or even stop hiking interest rates if it so desires.

According to the conventional wisdom, the Federal Reserve is in the process of “normalizing” interest rates and will continue to push rates up into the foreseeable future. But could the Fed be close to the end of its tightening cycle? Peter Schiff made that case during a recent podcast. 

In fact, Peter has been saying the US central bankers have been looking for excuses not to push interest rates up too fast. For instance, during the May meeting, they suddenly started talking about “symmetric inflation,” hinting they may be willing to let the inflation rate push above the mythical 2% target.

I think the Fed is going to be looking for every excuse under the book not to raise interest rates aggressively, no matter how high inflation gets. But of course, they’re not going to be that transparent. That’s the last thing they’d want to do is let the markets know that they’re that impotent when it comes to inflation fighting. But certainly, their language leaves a lot of room for opinion.”

Now St. Louis Fed President James Bullard has come up with another reason for the central bank to slow its roll, saying the Federal Reserve will have difficulty raising interest rates significantly beyond the settings of its Japanese and European counterparts.

Of course, the Bank of Japan and the European Central Bank have continued their easy-money policies, even as the Fed launched into tightening. The ECB had hinted it may soon end quantitative easing, but with things quickly spiraling out of control in Italy, that seems less likely.

It is hard for US rates to get too far out of line with the global rate situation, and obviously, both the (Bank of Japan) and the (European Central Bank) are continuing very accommodative policies. Is it constraining? It is in the sense that there is a global equilibrium of rates and if you get too far out of line things have to happen, exchange rates have to move, and other things have to happen.”

Bullard has been one of the more dovish Fed presidents. During a speech this week, he said interest rates may have already hit the neutral level – the point where they neither encourage nor discourage economic activity. He also reiterated that the Fed doesn’t need to hike further in June because inflation expectations remain low. If the current policy rate is at neutral, “it may not be necessary to change the policy rate” in order to keep the economy close to or at the Fed’s goal, Bullard said.

There are a couple of takeaways from Bullard’s comments.

First, he has a point. The Federal Reserve isn’t the only game in town. American investors tend to focus almost exclusively on American policy. But the ECB, the Bank of Japan and other countries’ central banks also have a major impact on the global economy and things like the price of gold. We shouldn’t focus exclusively on the Fed.

Second, this gives credence to Peter’s point that the Fed is looking for reasons to stop pushing rates up. The central bankers know they can’t take the easy money punch bowl completely away without major consequences. And when things do tank, they will almost certainly go back to the well of zero interest rates and QE. But as Peter said, it may not work this time around.

I think the next time the Fed has to go to that well, it’s going to be dry. The next time they try to stimulate the economy with rate cuts and quantitative easing is going to be the last because they are going to end up destroying the dollar and destroying the bond market in the process.”

Get Peter Schiff’s most important Gold headlines once per week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!