Peter Schiff: The Fed Has Already Lost the Inflation Fight

Last week, the Fed raised interest rates by 0.5%. It was the biggest rate increase since the year 2000. But it was hardly aggressive in light of the current bout of inflation. Not only that, Jerome Powell took a future 75 basis point hike off the table. In his podcast, Peter Schiff argued that no matter what the Fed does, it has already lost the inflation fight.

The stock market collapsed on Thursday after digesting the rate hike. That more than erased the rally last Wednesday in the immediate aftermath of the FOMC meeting.

Peter said he thinks the recent Fed actions don’t matter. The markets are going down for reasons other than a 50 or 75 basis point rate hike.

Either hike is inadequate for the task at hand. It doesn’t matter. It’s too little, too late. Fifty, 75, 100 — the Fed is not in a position to raise interest rates anywhere near enough to slow down inflation. But any attempt to raise interest rates, even slightly, will prick the bubble, which it’s already done, and the air is coming out. So, the Fed will succeed in killing the economy, but it will not kill inflation.”

Peter said there were so many debacles in the stock market last Thursday that it was hard to even focus on specifics, but he noted Etsy was down 16.8% and eBay was down 11.7%. Both of these companies sell products online.

Obviously, they don’t sell food. They don’t sell gasoline. And so when people are spending so much money on basic necessities, they don’t have money left over to buy somebody’s used clothes on eBay or whatever they sell on Etsy.”

Shopify is also feeling the pinch for the same reason.

Peter said there is nothing to hang your hat on if you’re looking for a bottom.

The technical picture is bleak and the fundamental picture is even bleaker.”

He said there is no reason to think we are anywhere near the bottom unless the Fed does an about-face. Of course, that is a possibility.

But as long as the Fed is going to pretend that it’s going to fight inflation, the market is going to keep going down.”

At this point, it appears the markets still believe that the Fed is going to do what it claims it’s going to do – keep hiking and beat back inflation. But Peter said what the Fed claims it’s going to do is impossible.

Especially given what it’s saying it’s going to do, which is maybe raise interest rates up to 2.5 or 3 percent. Even if they do that, it is wholly inadequate to bring down an inflation rate that officially is 8 or 9 percent, but unofficially, in reality, is probably closer to twice that level. There is no way the Fed is going to be able to succeed. But what it is succeeding in doing by pretending it can fight inflation is crashing the stock market.”

Meanwhile, productivity just saw its sharpest drop since 1947.

The April jobs numbers hit expectations, but the labor force participation rate unexpectedly dropped. The Fed and others point to the strong labor market as a sign the economy is strong. But it’s important to remember that labor data is a lagging indicator. Once layoffs start, the economy is already in deep trouble.

Peter said he thinks that there is already more than enough evidence to conclude that we’re already in a recession. We had a negative GDP in Q1. If GDP contracts again in Q2, that will mean we are in a recession, and that we were in a recession in Q1.

Think back to 2008. In retrospect, we know the Great Recession started in December of 2007. But in early 2008, all of the pundits were insisting we weren’t in a recession and everything was going to be OK.

If I’m right, and we’re already in a recession now, this recession is going to be worse than that one. In fact, this may not be the worst recession since the Great Depression. This will be the worst recession including the Great Depression because it will be accompanied by very high inflation.”