Peter Schiff: Powell Promises Pain

Jerome Powell delivered his much-anticipated speech at Jackson Hole on Friday. He continued with the hawkish talk we’ve been hearing in recent weeks, pledging the Fed will “use our tools forcefully” to attack inflation. Powell even promised some pain. As Peter Schiff discussed in his podcast, the markets immediately delivered on the promise of pain. But the question remains: do Powell & Co. really have the pain tolerance they claim?

Powell said that even though the Fed has aggressively raised rates to 2.25%, this is “no place to stop or pause.” He also conceded that this monetary policy would likely slow economic growth.

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Peter noted that the speech was very short.

Eight minutes is all it took to send the Dow Jones down better than 1,000 points by the close.”

But Peter said Powell didn’t really say anything he hadn’t said before.

I think maybe what spooked the markets was how succinct he was and how direct he was. … What he read was actually pretty harsh. Maybe it was a wakeup call for a lot of people that expected the Fed to back away from its tight monetary policy, especially since the economy is weakening.”

In the past, Powell has talked about a “soft landing.” Now all of a sudden, he’s talking about pain.

When Powell is now saying that fighting inflation is going to require pain, he is implying it’s a hard landing. Because that’s the kind of landing that is painful.”

Powell reiterated that the Fed needs to take rates into restrictive territory (Although it seems unlikely the central bank can go as restrictive as necessary.) and hold them there to ensure inflation is brought back to the 2% target. Powell said the Fed doesn’t want to risk easing prematurely.

Now, this is really the opposite of the position that the Fed took before COVID. Because, if you remember, back then Powel was saying what the Fed didn’t want to do was raise rates too quickly to fight inflation and risk hurting the economy. What Powell said is we want to make sure that inflation is higher before we act. We’re not going to be preemptive, which is what central banks have done historically. They always want to preempt inflation. You never want to let the genie out of the bottle.”

But the Fed strategy after COVID was to let the genie out and then try to stuff her back in if she actually got loose. At the time Peter said this was a horrible plan.

There is a reason you don’t want to let the genie out of the bottle. It’s because it is so difficult to get it back in. That’s why it’s worth the pain to prevent her from getting out in the first place, because you have much more excruciating pain trying to put her back in.”

Peter said that even though Powell now acknowledges there will be pain, he still thinks the Fed chair is sugar-coating how excruciating the pain will be.

I still believe that the Fed is going to pivot even though the odds of that pivot now are being pushed back by the markets given the commitment that the Fed has to fighting inflation and making sure that whatever success that they have sticks. … I believe that this commitment is not as sincere as Powell claims because the pain that he is willing to accept is much less pain than is actually going to be delivered if the Fed is going to keep its commitment to trying to get inflation anywhere near 2%.”

Peter said he thinks the actual pain would be a massive recession of historic proportion that might even be considered a depression and a financial crisis worse than 2008.

Is the Fed really willing to endure that kind of pain?”

Keep in mind that they weren’t willing to endure the pain during COVID.

The pain that they would have to allow the economy to endure to successfully return inflation to 2 percent would be much greater than the pain that we felt back then. And if that pain was too much for the Fed to bear, and the Fed intervened, why would they not do the same thing again? Is this Fed really so committed to fighting inflation and bringing it down to 2 percent that it doesn’t care what happens? I don’t believe so. I think the only reason the Fed is claiming that it’s committed to this goal is because it believes it can achieve the goal with a minimal amount of pain.”

In a nutshell, Peter thinks this is more “open mouth operations” by the Fed.

When you have no stick, you have to speak loudly. And that is exactly what Powell is doing. Powell has to talk tough about fighting inflation because he can’t act tough. But he can’t let the markets know that he can’t act tough because that would create an even bigger crisis. So, this is all bluff.”

In this podcast, Peter also covers student loan forgiveness and the bad economic data that came out last week.