Peter Schiff: The Fed Can’t Fight What It Doesn’t Understand

With the Federal Reserve delivering a smaller 25 basis point rate hike at its February meeting, there is a perception that the central bank is nearing victory in the inflation fight. But as Peter Schiff pointed out during his podcast, Jerome Powell made several statements that indicate he doesn’t really understand inflation. That raises a question. How can the Fed fight what it doesn’t understand?

The markets are certainly behaving as if the tightening cycle is finished.

I think traders are looking at the softening economic data and a pullback in some of the inflation measures that we’ve had in recent months, and they think that the Fed is done hiking now even though Powell indicated that a couple more hikes are coming.”

Peter said the markets also seem to believe that inflation is going to be coming down faster.

But the reality is inflation is not going to weaken. It’s going to strengthen. The economy is not only going to weaken, but weaken much more than the markets expect. So, the markets may in fact be right that the Fed stops hiking. But not because inflation comes down, but because the economy comes down, or because employment comes down and unemployment goes up. But as of now, everybody thinks everything is great. It’s a Goldilocks scenario. People are looking for a soft landing where the economy weakens just enough to bring down inflation but not enough to bring down corporate earnings.”

Peter said the weakness in the dollar is going to be the catalyst for another explosive move up in commodity prices.

And it’s the decline in commodity prices that is helping to keep down goods prices, which is why everybody is so convinced that we’ve seen the worst of inflation and it’s headed lower. But as commodities start to make new highs when the dollar makes new lows, that’s going to throw cold water on that theory, and people are once again going to be afraid of higher inflation. But I think the Fed is going to be afraid to fight it because it’s afraid of what that fight might do to a much weaker economy and much weaker labor market than what the Fed now expects.”

During his press conference, Jerome Powell acknowledged that pain inflation causes Americans.

Because the real cause of inflation is the US government and the Federal Reserve acting in concert with one another, where the US government spends money it doesn’t have, and then the Fed prints the money for the government to spend — that is why we have inflation. So, if inflation is causing an economic hardship, and if the government and the Fed cause inflation, then it’s the government and the Federal Reserve that are responsible for that hardship.”

Keep in mind, inflation is a tax. It’s how we pay for big government.

Powell said in order to get inflation back to 2%, it will require below-trend economic growth for some time and a softening of labor market conditions. Peter said this is one of many economic concepts Powell got wrong.

In order to bring down inflation, you don’t need to restrain economic growth. You need to restrain the growth of the money supply. You need to restrain spending that results from money printing or excess credit.”

And we don’t need to put people out of work to bring down prices.

We need to put more people to work. That’s what we need. People working means we produce more stuff. The more stuff we have, the lower the price of that stuff.”

Peter pointed out that the large deficit spending going on in Washington D.C. is exacerbating the situation by flooding the economy with fiscal stimulus.

That is interfering with the Fed’s fight against inflation. If the Fed was really serious about fighting inflation, Powell would be demanding that the federal government cut spending. Instead he’s doing the opposite [by urging Congress to raise the debt ceiling].”

A reporter asked Powell if there is any evidence of a “wage-price spiral.” Peter noted that there can’t be any evidence of such a thing because it doesn’t exist.

The whole concept of a wage-price spiral was dreamed up by a bunch of Keynsian economists during the 1970s that were looking for a scapegoat to blame inflation on.”

Prices don’t go up because wages go up.

Wages are, in fact, prices. They’re just the price of labor. And prices don’t go up because prices go up. Wages go up and other prices go up because the government creates inflation. But Powell wants people to think that inflation is created by the private sector, that the Fed is just some innocent bystander — and the government.”

Peter said the fact Powell doesn’t understand this is more evidence that Powell doesn’t understand inflation.

Along those same lines, Powell said the Fed has a bedrock belief that consumer expectations play a large part in creating inflation. In other words, consumer perception of what might happen actually causes it to happen. Inflation becomes a self-fulfilling prophecy.

This is just another way for the Federal Reserve to point the blame for inflation at the private sector, at consumers, or maybe at businesses. But the reality is consumers are not causing inflation to go up because they expect it. Inflation is going up because the Fed is creating inflation, because the government is creating inflation. Consumers are simply reacting to the inflation that has already been created.”

If consumers suddenly decide there is no more inflation but the Fed keeps creating money out of thin air — creating inflation — it doesn’t matter. Consumers will still get higher prices no matter what they think.

This all raises an important question: if Jerome Powell and other central bankers at the Fed don’t understand inflation, how will they successfully fight it?

Short answer: they won’t.

In this podcast, Peter also talks about the market reaction to the FOMC meeting, economic data, and fraud surrounding PPP loans.