Peter Schiff: Fed Tries to Temper Rate Cut Enthusiasm

After the Federal Reserve effectively surrendered to inflation at its December meeting, projecting three rate cuts next year, New York Fed President John Williams tried to walk the surrender back. In his podcast, Peter Schiff analyzed Williams’ more hawkish comments and compared them to Powell’s dovish stance after the FOMC meeting.

Williams said, “We aren’t really talking about rate cuts right now,” and that it’s premature to expect rates to fall in the opening months of 2024.

We’re very focused on the question in front of us, which as chair Powell said… is, have we gotten monetary policy to sufficiently restrictive stance in order to ensure the inflation comes back down to 2%? That’s the question in front of us.”

Williams tried to pivot back to the “data-dependent” mantra.

It is looking like we are at or near that in terms of sufficiently restrictive, but things can change. One thing we’ve learned even over the past year is that the data can move and in surprising ways, we need to be ready to move to tighten the policy further, if the progress of inflation were to stall or reverse.”

Gold had rallied to close to $2,050 before Williams’ open-mouth operations. After his comment, gold dropped, closing around $2,019 on Friday.

Peter said Williams’ comments were “kind of a shock.”

Two days after Powell talked so much about rate cuts, to have another FOMC member saying we’re not even talking about rate cuts. Well, what the hell just happened during the press conference?”

In effect, Williams tried to put rate cuts on the back burner.

Powell moved them to the front of the stove on Wednesday. So, he’s now pushing them back, saying, ‘No, No! We’re still focused on inflation and whether or not we’ve whipped its butt, and if our policy is still tight enough or if we have to tighten some more.’ This caught a lot of people off guard.”

Peter said investors who started second-guessing positions they took after the Fed meeting likely drove the drop in the price of gold. But he said he doesn’t read a lot of significance into Williams’ comments. Peter said he didn’t think Williams was trying to do “damage control,” but was just trying to temper the optimism.

I think maybe after Powell really saw the reaction in the markets to his statement, he thought maybe we ought to backtrack a little and maybe send out a bad cop, because, you know, Powell is the good cop giving the markets what they want – rate cuts. And now we have this bad cop that can say, ‘Maybe not so fast. Maybe we’re not going to have those rate cuts,’ trying to restrain the enthusiasm and the try to slow down the markets front-running those rate cuts.”

Peter said he doesn’t think any of the Fed officials go out and talk completely off the cuff.

So, I think he was sent out there to kind of push back a little bit, but I don’t think that indicates that what Powell said on Wednesday has been negated. No, no, no. I think a lot of thought went into those FOMC minutes, and the press conference and the Q&A.”

And regardless of what Williams said, Peter said he thinks “it’s clear” the Fed is done hiking interest rates.

Now, they want to pretend they’re still data-dependent on inflation. But if they really were data-dependent, the data doesn’t support cuts that they’re talking about. In fact, as far as I’m concerned, the data still argues for more hikes. So, they’re not really data-dependent, but they can’t let that cat out of the bag. They still have to get the markets thinking that they’re vigilant and they’re on the job, and that if they do see some inflation, why, they’re willing and ready to hike rates. But they’ve indicated they’re not going to do that.”

The dot plots support Peter’s contention. If the FOMC wasn’t planning for rate cuts, the dot plots wouldn’t show falling interest rates.

The Fed funds rate doesn’t just arbitrarily move around. The only way the Fed funds rate will be as low as the FOMC members believe it will be a year from now, two years from now, is if they in fact vote to reduce the rate.”

Nevertheless, Peter said he isn’t certain the Fed will be able to deliver cuts as deep as projected because of dollar weakness.

If the markets start marking down the dollar in advance of the first rate cut, that actually makes it harder for the Fed to cut. … If the Fed cuts rates into a weakening dollar, it will just accelerate that weakness.”

Regardless, Peter said he thinks Powell’s comments after the FOMC meeting were far more significant than what John Williams said on Friday.