Peter Schiff: Fed Folds With a Soft Pivot

We have been saying the Federal Reserve is bluffing in this inflation fight because it is holding a losing hand.

And Peter Schiff thinks the central bank has folded with a soft pivot. He explained why on his podcast.

I’m going to go out on a limb here and predict that we’ve already seen the Fed pivot. Now, it wasn’t a pivot in the sense that the Fed has gone from hiking interest rates to cutting interest rates. It hasn’t gone from quantitative easing to quantitative tightening. But it is a pivot in rhetoric. And what it amounts to is an easing of monetary conditions. Because what the Fed is going to be doing going forward is starting to walk back just how aggressive its rate-hiking campaign is going to be.”

The shift may be subtle, but it will be significant. Instead of talking about the urgency of the inflation fight, Peter said he thinks the central bankers at the Fed will start talking about how much progress they have made.

Since they’ve made progress, maybe not completely declaring victory, but indicating they’re seeing the light at the end of the tunnel — that maybe they don’t have to raise interest rates as high as they thought, or maybe leave them as high for as long as they thought. And so the path back down to 2% inflation may not require as aggressive a rate-hiking campaign as they may have previously thought before they started to see the evidence of their success.”

What led Peter to this conclusion?

Last Thursday (Oct. 20), the bond market looked close to a complete collapse. That morning, the yield on the 30-year Treasury nearly rose to 4.4%. Meanwhile, the curve between the 10-year and the 30-year moved positive out of inversion. This was a sign investors were beginning to price in prolonged inflation. Meanwhile, the stock market was also under pressure due to the weakness in the bond market.

The Achilles heel of this bubble economy is interest rates because we’ve got so much debt. And if interest rates rise high enough, the whole thing is going to collapse.”

Consider this tweet Peter sent last Friday.

The 10-year Treasury yield hit 4.33%, its highest since Nov. 2007, when the Nation Debt was under $9 trillion. Today it's over $31.2 trillion. At 4.33%, annual interest on the National Debt would exceed $1.35 trillion, more than is spent on National Defense or Social Security.

— Peter Schiff (@PeterSchiff) October 21, 2022

That would make the interest on the debt the biggest US government expense. (You can read a more in-depth analysis of the national debt HERE.)

Do you see the problem here? Debt is spiraling out of control and is going to crowd out all of the other government spending.

At the rate the National Debt and interest rates are rising, before the decade ends interest on the National Debt will exceed 100% of federal tax revenue. The entire Federal Government would then consist of the Treasury Department, which would just collect taxes and pay interest.

— Peter Schiff (@PeterSchiff) October 21, 2022

Basically, the US government would become a conduit from taxpayers to bondholders. Now obviously, this can’t happen. At some point, something has to give. And I think that something already gave. I think it gave on Friday morning, and that’s why I think the Fed folded with this ‘soft’ pivot. The reason I’m saying a soft pivot and not a hard pivot is because the Fed is still on the trajectory of hiking rates. I just think it shifted into a lower gear. So that, in and of itself, constitutes an easing. Even if the Fed is tightening, if it’s tightening less aggressively than the markets had thought, then it’s an easing. It’s a forward guidance that is easing conditions a little bit and telling the markets, ‘Hey, you’re too tight. You’re pricing in too many rate hikes. Because we’re probably not going to have to hike as many times as you think. The terminal rate is not going to be as high as you think because we’re already making good progress.'”

The soft pivot was telegraphed to the markets by a Wall Street Journal report saying some Fed members were expressing “unease” and were concerned about overtightening. The story reported that San Francisco Fed President Mary Daly said, “The time is now to start planning for stepping down.”

Peter went on to detail some of the bad economic data the Fed will also have to reckon with including contractionary October PMI, tanking consumer confidence, and rising shelter costs (even though housing prices are falling).