Peter Schiff: The Fed Inflation Fight Will Cause a Recession — And More Inflation

The markets seem to be anticipating a Fed inflation fight. They also seem to be realizing that this is going to cause a recession. But they still haven’t come to grips with the fact that this is not going to fix the inflation problem. In his podcast, Peter Schiff argues that the recession will actually end up making inflation worse.

The stock market finished up last week with more selling as investors begin to price in more Federal Reserve rate hikes. Some analysts now expect as many as 10 hikes by the end of 2022. Peter said that is scaring the markets.

And in fact, if you look at the yield curve, the yield curve is actually flattening because investors are actually starting to price in the recession that this hawkish Fed is going to cause by jacking up interest rates.”

Peter said the 10-year Treasury yield is factoring in a drop in rates that will follow all of the hikes because they will cause a recession.

This has barely begun to set in on Wall Street. When more and more traders grasp this reality, there’s a lot more downside in stocks. But more importantly, if the Fed acts to stop the carnage on Wall Street, there is way more downside in the US dollar, way more upside in gold.”

But in the big scheme of things, 10 rate hikes are nothing. If each hike is 25 basis points, the interest rate will only be at 2.5% after 10.

Big deal. Inflation is 7.5%. And of course, it’s actually 15%.”

We don’t even have to use the real inflation rate to make the point. We can accept the government’s cooked CPI data. Even if the Fed raises rates to 2.5%, you’ve got -5% real interest rates. The reality is that a 2.5% interest rate in the face of 7.5% inflation is like taking a pea shooter to a bazooka fight. In order to truly tame inflation, the Federal Reserve needs to push interest rates above the level of inflation. Nobody is talking about rate hikes up to 7.5%.

You’re not going to fight inflation with 5% negative rates. There is no history that shows this. It’s impossible. It contradicts any type of economic school of thought you want to put forth.”

And even if the Fed manages to hike 10 times, the CPI will likely be even higher by the time rates get to 2.5%.

So, the Fed will actually be further behind the curve when it gets to 2.5% than it is right now at zero. It’s because moving so slowly allows inflation to accelerate. Because the entire time the Fed is hiking rates, it is still pursuing an expansionary monetary policy.”

St. Louis Fed president James Bullard even conceded this in an interview last week.

But while they are not sufficient to fight inflation, these rate hikes will probably push the US economy into a recession. The markets seem to be starting to grasp this reality. But they still think that the recession will do the job for the Fed and push inflation down.

In other words, the Fed won’t fight inflation with tight money, but simply making money less loose will be enough to tip the economy into recession, and the recession will fight inflation. Because the conventional wisdom is if we have a recession, that is going to reduce demand, and that is going to bring down the rate of inflation. So, that’s what the markets are counting on. It’s not the Fed that’s going to fight inflation. It’s going to be the recession.”

A lot of analysts are calling this a “policy mistake.” They’re worried that the Fed will “hike too much” and cause an economic downturn. But Peter said a recession wouldn’t be a mistake.

The recession is the cure for the mistake. The mistakes were made a long time ago. The Fed continues to make mistakes in raising rates too slowly, not because faster rate hikes will cause a recession, but because they’re trying to delay the recession because the recession is the cure. But the problem is the economy is so sick, we can’t survive the cure.”

We survived the cure in 1980 when Paul Volker pushed rates to 20%. And we had some relative prosperity on the back end. But we can’t do that now. There is too much debt in the system. The underlying economy is much weaker now than it was then.

I mean, we could, in theory, in the long run. But given the political realities that will intervene in the short run, there is no way it’s going to happen.”

So, what will happen when the economy tips into recession? Peter said inflation is going to get even worse — not better. That genie is already out of the bottle.

When the economy tips, inflation will still be high. And the Fed will do what it always does — it will pivot right back to extraordinary loose monetary policy. It will cut rates. It will resume quantitative easing.

When the Fed has to start taking back whatever rate hikes it managed to get in, when the Fed has to go back to QE, the bottom is going to drop out of the dollar.”

Also in this podcast, Peter goes on to talk about how the tanking dollar will constrict domestic supply, further exacerbating inflation. He also discusses Democrats trying to bribe Americans with a gas tax holiday, bitcoin, the situation in Ukraine, and the Cathie Wood ETF.