Peter Schiff: The People at the Fed Aren’t Hawks; They’re Chickenhawks

Federal Reserve Governor Lael Brainard sounded a hawkish tone on Tuesday, promising to ramp up the inflation fight. As Peter Schiff put it in his podcast, the uber-dove started talking like a super-hawk. But the Fed members aren’t really going to be able to follow through on this inflation fight. In reality, they aren’t hawks. They’re chickenhawks.

Brainard said the Fed would raise rates methodically and shrink its balance sheet at a “considerably” more rapid pace than it did during the previous cycle.

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19,” she said.

Brainard’s comments were reminiscent of Jerome Powell’s tough talk the week following the Fed’s first interest rate hike in the so-called fight against inflation.

Peter said there is nothing hawkish about anybody at the Fed, but many people on the Federal Reserve board are pretending to be hawkish.

They can’t actually be hawks, so, they’re chickenhawks. But they don’t want to acknowledge the pretense, so they have to put on a good show. The markets don’t really understand that these guys are bluffing, and so when they talk tough, the markets pay attention.”

Brainard’s tough talk spooked the bond market. There was intense selling and yields spiked. Stocks also sold off. But Peter said there is even more selling to come.

Yields are still much too low given the reality of A. how bad inflation already is and B. how much higher the Fed is going to have to raise interest rates to actually do something about inflation.”

Brainard threw down the gauntlet by quoting former Fed chair Paul Volker. As you may remember, Volker pushed interest rates to 20% in the early 80s to rein in inflation. Brainard basically said that runaway inflation is now the greatest threat to the economy and ultimately to employment. If the Fed wants to maximize employment, it has to ensure to there isn’t runaway inflation. Of course, even admitting the possibility of runaway inflation is a very dangerous reality for bond investors to face.

Brainard said, “inflation is much too high and subject to upside risks.”

She didn’t just say inflation is ‘too high.’ She said ‘it’s much too high.’ And of course, that is an understatement because it is really much too high. But to hear Brainard admit that it’s much too high is significant. And then she also said that the risks are to the upside. Not only is it much too high, the risk is that it’s going to get even higher. So, that is a big admission on the part of the vice-chair nominee.”

But it was the commitment to shrink the balance sheet “rapidly” that really spooked the markets. As Peter put it, those are fighting words. But is there really any fight in the Fed?

If the Fed were as committed to fighting inflation as Brainard is pretending they are, why wait until May? This is just the beginning of April. Why wait another month, month-and-a-half? Start shrinking the balance sheet right now. If the Fed was committed to fighting the ‘much too high’ inflation, why did they continue to grow their balance sheet after they acknowledged that inflation wasn’t transitory? In fact, if the Fed really were serious about fighting inflation, interest rates wouldn’t still be at one-quarter of one percent.”

Now the Fed is talking about 50 basis point rate hikes in upcoming meetings. But it is so far behind the inflation curve; it should be raising rates right now – not at some point in the future.

At the rate inflation is accelerating, the Fed risks falling further and further behind the curve while it’s waiting to fight this inflation monster that it already acknowledges is too big. So, start fighting it now. Raise rates aggressively right now. Start shrinking your balance sheet right now. Of course, the Fed is not doing any of that. The Fed just wants to talk about doing that because it hopes it can talk about it instead of actually doing it because it really can’t.”

That doesn’t mean the central bank won’t get the process started.

They may very well have to follow through initially with some 50 basis point rate hikes. They may have to start shrinking their balance sheet. But soon after they start, they’re going to stop. The more aggressive the Fed gets in this inflation fight, either just talking about it or actually doing it, the quicker that fight is going to end. Because they’re not going to win the fight against inflation. Inflation is not going down. It’s the economy that’s going down. It’s the market that’s going to go down. And the minute that happens, well, the Fed is going to abandon its pretend inflation fight and have a whole new fight to try to prop up the stock market and prop up the economy.”

The policymakers at the Fed insist the economy is strong enough to handle the tightening monetary policy. But Peter said the economy is not stronger than it was during the post-2008 recovery.

It’s just a bigger bubble. It only appears stronger to the Fed that doesn’t understand that this artificial strength is purely a function of all this monetary heroin that the Fed has injected into the economy. Now they’re threatening to remove it, and they think somehow the economy is going to stay high as a kite if they take away the drugs that are the reason it’s high. It won’t happen.”

In this podcast, Peter also talks about why the Fed can’t “rapidly” reduce its balance sheet and how sanctions created a bottom and a bull market for the ruble.

Photo by DonkeyHotey