Peter Schiff: Jerome Powell’s Ignorance Won’t Be Bliss

In its last meeting of 2020, the Federal Reserve made it clear the easy-money spigot will remain wide open into the foreseeable future. During his post-meeting press conference, Federal Reserve Chairman Jerome Powell seemed clueless about the ramifications of this policy – particularly the impact of inflation. Peter Schiff talked about the Fed meeting and Powell’s comments in his podcast, saying Powell’s ignorance won’t be bliss.

The FOMC held the Fed funds rate at zero and committed to continue buying at least $80 billion a month in Treasuries and $40 billion a month in agency-backed securities “until substantial further progress has been made on maximum employment and price stability goals.”

“These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the FOMC said in its statement. In other words, the Fed will ensure businesses and consumers can continue piling on debt.

While the central bank did not announce any expansion of quantitative easing, Powell said did open the door to increasing its asset purchase program down the road, both in the number of bonds it buys and in the maturity of the bonds. It will almost certainly have to at some point. Bank of America analysis shows that the Fed will have to double its current rate of Treasury purchases just to keep up with the current level of US government borrowing.

Powell also continued to push Congress to pass additional fiscal stimulus. “The case for fiscal policy right now is very, very strong and I think that’s widely understood,” Powell said, adding that now is not the time to concern ourselves with the national debt.

From my way of thinking the time to focus on that is when the economy is strong, unemployment is low and taxes are pouring in and there’s room to get on a sustainable path because the economy is doing well.”

But whether he worries about it or not, more stimulus will mean bigger deficits and the only way to prevent those deficits from pushing interest rates higher will be to expand QE and monetize the debt.

All of this money printing means higher inflation and a weaker dollar, and we’re already seeing the signs. Even before the FOMC statement, the dollar index hit its lowest level since April 2018. It is currently only 3% above a 6-year low. Peter said he thinks there is a chance we could take out that low before the end of the year.

That will set the dollar up, I think, for a dramatic decline in 2021. In fact, I would be surprised if the dollar hit a new all-time record low, the dollar index anyway, in 2021. And if we don’t get there in 2021, I think we’ll get there in 2022.”

That would mean a drop in the dollar index to just below 71.

That’s when the crisis is going to start. It’s going to be when the dollar is at a new low and keeps on falling.”

The Fed projected economic growth next year to come in at 4.2%. That seems like strong growth on the surface, but not when you factor in just how much the economy has contracted this year. On top of that, Peter said he thinks inflation will rule the day, not actual growth.

Powell reiterated that the central bank is targeting an inflation rate “slightly above 2%” but emphasized that the long-term goal is still to keep inflation anchored at the 2% target. In other words, he wants the markets to think after allowing inflation to run hot over 2% for a short time, it will come back down. Peter asked, “How is that going to happen?”

Assuming the Fed is successful and the official inflation rate is above 2%, and in order to get above 2%, it needs to be rising, so, if inflation is accelerating and above 2%, based on what would the markets expect that situation to reverse? Because once the inflation genie is out of the bottle, why would anybody believe the Fed can put it back in? What is the credible policy tool that the Fed has to rein in inflation if expectations start to run away? Nothing. They’re not going to raise interest rates. They’re not going to shrink the balance sheet. We know that. So, the idea that the Fed can both have inflation that is above 2% and yet keep future inflation expectations anchored at 2% is impossible. There’s no way the Fed can do both.”

Powell claimed the reason we don’t have to worry about the surging budget deficits and the rapidly ballooning debt is because interest rates are so low. He seems to miss the connection between the Fed itself and the low interest rates.

The only reason interest rates are so low is because the Fed. Just like the Fed is supplying the demand in the housing market and that’s why housing prices are up, it is supplying demand in the Treasury market. That’s why Treasury prices are up. That’s why interest rates are down. The reason that the rate on interest that the US government is paying is so low is because the Fed is manipulating the market. So for Powell to say he’s not worried about the sustainability of the deficits because interest rates are so low — they’re only that low because the Fed is worried.”

If it weren’t for the Fed backstopping the bond market and monetizing the debt, interest rates would already be rising, exposing the fact that the US government has already gone beyond the limits of “sustainable” deficits. The question is whether or not the Fed can keep doing this indefinitely and the answer is no.

Eventually, the dollar has to give way.”

And the signs that the dollar is about to implode are already there.

Powell claimed the reason prices went up every year in the 70s was a matter of psychology. He said there was a mindset where people expected prices to go up and so they did. Since people don’t have those expectations today — we don’t have to worry. As Peter put it, this shows Powell is clueless about inflation. The inflation of the 70s wasn’t driven by psychology. It was driven by the loose monetary policies and the debt monetization that started in the 1960s and continued into the 70s.

It wasn’t the psychology. It was the money. It was the inflation that the central bank created that was driving up prices. It didn’t stop until the Fed changed policy in 1980 under Paul Volker and then we started clamping down. That’s what changed the dynamic. But of course, the Fed is not only unwilling to do what Volker did, it’s impossible to do what Volker did given the amount of debt that we have now that we didn’t have when Volker was Fed chairman. So, we’re in a position where we can’t rein in inflation once it gets out of control.”

The fact that Powell doesn’t seem to understand that inflation is a monetary phenomenon and that he has his hand on the printing press is more than a little disturbing. Peter said we’re heading toward an inflationary depression and Powell is completely clueless.

And so is Yellen. And so when the two of them put their heads together in 2021 all these guys are going to do is add fuel to this fire.”