Peter Schiff: The Federal Reserve Is Nowhere Near Victory

The mainstream is optimistic about both the economy and the Fed’s fight against inflation. In his podcast, Peter Schiff took apart the mainstream narrative, explaining that the economy is much weaker than most people realize and the Fed is nowhere near victory in the war on inflation.

We’re seeing a Santa Claus rally in stock in January, especially in the speculative momentum stocks. We’ve also seen a rally in the bond market. Peter called it a dead cat bounce.

What’s driving the move up in both stocks and bonds is the weakness in the economy. Because we continue to get more weak economic data. And not just weak economic data on the economy. There’s still hope that inflation has peaked, and the lower numbers that we’ve been seeing when it comes to month-over-month or year-over-year inflation rates — that this trend is permanent and therefore the inflation battle is over. The Fed can declare victory and start cutting rates and easing up on policy. All of this is what is creating the narrative that is driving this move up in both stocks and bonds. But I think as the year progresses, it’s going to be more obvious that inflation hasn’t peaked, that the Fed is nowhere near victorious in this fight, and the economy is actually going to be even weaker than the markets think.”

The mainstream narrative is that the economy will be weak enough to restrain the Fed, but not weak enough to put a big dent in corporate earnings.

They’re wrong. The economy is going to be much weaker than investors think, and it’s going to have an even bigger impact on earnings than investors think. But inflation is going to be much higher than anybody thinks, and that is really going to complicate the situation for both the Federal Reserve and the economy.”

We got the first look at Q4 GDP last week. The 2.9% increase was slightly better than projected.

The last two quarters of 2022 made up for the back-t0-back declines charted in the first and second quarters. That adds weight to the argument that we weren’t in a recession during the first half of the year. But Peter said he doesn’t think we had any real economic growth at all in 2022. He thinks the GDP deflator for the year was too low.

Just like with the CPI, the GDP deflator, I believe, dramatically understates what’s actually happening with consumer prices. I still think in 2022, the real increase in prices was north of 15%, which means if we accurately measured prices to determine the deflator for 2022 GDP, we would have in fact seen a massive contraction in the economy. That’s what’s actually happened. The government is covering it up by cooking the books. But in reality, the economy is shrinking.”

One of the prime reasons we saw an improvement in GDP during the last half of 2022 was an improvement in the trade deficit. The trade deficit was still huge, but not as huge as before.

One reason the trade deficit improved was the strength of the dollar. That lowered the cost of imports. But dollar strength began to unwind in the last half of Q4 and the dollar index is down about 1.5% in 2023.

The weakening dollar is now going to worsen the trade deficit.”

The release of oil from the strategic reserves last year also narrowed the trade deficit.

We’re not going to be doing that in 2023, so the trade deficits are going to be getting bigger and that is going to be subtracting from GDP.”

Peter said he thinks the US economy will get progressively weaker as the year goes on.

The Fed’s favorite inflation number – the Personal Consumption Expenditures Index (PCE) came in at 4.4% for 2022. That is more than double the Fed’s 2% target. But because it is closer to 2% than it has been in the recent past, the markets view it as a positive number. But Peter said in reality, PCE confirms that the Fed is nowhere near victory when it comes to the inflation fight.

That’s because it hasn’t nearly increased interest rates enough to put out this inflation fire. But more importantly, the federal government hasn’t cut spending at all. In fact, it has increased government spending. So, the inflationary forces that underlie the economy are actually getting stronger, not getting weaker. It’s just that investors haven’t been able to figure this out yet.”

Two things need to happen in order to beat inflation. We need positive real interest rates — an interest rate above the CPI. And we also need the US government to cut spending and stop running huge budget deficits. A Fed paper admitted that it can’t tame inflation with monetary policy alone, saying, “When the fiscal authority [the federal government] is not perceived as fully responsible for covering the existing fiscal imbalances, the private sector expects that inflation will rise to ensure sustainability of national debt.”

Neither of these things will likely happen. That means the Fed can’t possibly win this war. It might be able to brag about “progress,” but it is doomed to fail.

In this podcast, Peter Schiff also talks politics, including the government going after Google’s so-called monopoly and a plan in San Francisco to incentivize African-American drug use.”