Peter Schiff: When Is the Market Going to Wake Up to this Con?

As expected, the Federal Reserve cut interest rates another 25 basis points on Wednesday.

The mainstream read the post FOMC meeting comments to be relatively hawkish, saying Powell and Company seemed to indicate that future rate cutting is on pause.

Peter Schiff opened up his podcast reminding us that just one year ago, the Fed was raising rates and telling us it would continue to do so through 2019. It also claimed that quantitative tightening was on “autopilot.”

And they said this with a straight face. And everybody believed them.”

At the time, Peter was saying it wasn’t going to happen. He said the central bank would start cutting rates and relaunch QE. And here we are.

The central bank removed the phrase saying it was committed to “act as appropriate to sustain the expansion” from its forward guidance. This was widely viewed as a more hawkish stance. The Fed replaced that language, instead saying, “The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.” Powell was more emphatic during his press conference, saying bank officials “see the current stance of monetary policy as likely to remain appropriate.”

Of course, Powell again claimed that the Fed is not engaged in quantitative easing despite the repo operations and bond-buying program. He tried to draw a distinction between QE and today’s operations by pointing out that the central bank is buying short-term bonds today while it bought longer-term debt during QE.

This is really a distinction without a difference. I mean, who cares what the maturity of the bonds are?”

If the Fed was going to simply let the bonds fall off the books once they matured, the length of the term might be relevant. But Peter said that’s not what’s going to happen.

They’re just going to keep rolling these bonds over … This is another source of financing, of the Fed financing government debt. That’s quantitative easing. I mean, why did the Federal Reserve do QE in the first place? To keep interest rates lower than they would have been had they not done quantitative easing. And, by extension, to prop up asset prices.”

And why is the Fed doing what it’s doing today?

For the exact same reason. To keep interest rates artificially low, to suppress the cost of borrowing, to help out all debtors so they can make payments on their debt and to keep the stock market elevated, to keep real estate prices elevated.”

We also got the GDP numbers on Wednesday. Growth came in at 1.9%. That was better than expected. But a big chunk of that growth was consumer spending and a revived housing market. This was a function of Fed policy.

The Federal Reserve is basically doing now what it was doing then, for the same reason it was doing it then, except it doesn’t want to admit. Powell doesn’t want to say that the Fed is doing quantitative easing. The main reason is he doesn’t want to admit the economy needs it.”

In fact, Powell keeps saying the economy is good.

Well, if everything is good, why do we need the emergency monetary policy when everything wasn’t good? When we were trying to get the economy out of a bad place, we did QE. And if it’s now in a good place, why are we doing it again? So, that’s why he wants to deny he’s doing it.”

When asked, Powell did admit that the current monetary policy is “accommodative.” Peter said it may even be more accommodative than it was when rates were at zero because inflation is higher. In fact. Powell admitted core CPI is finally above 2%. So, if inflation, even as the government measure it is above 2% and the Fed just dropped rates to 1.5%, we’re talking about negative real interest rates.

That is highly accommodative. I mean, why would the Fed be accommodating the strongest economy in the history of our country? Clearly, the reason Powell thinks we need so much support from the Fed is because he knows the economy is weak, that without the Fed’s help, it would implode. A strong economy doesn’t need the help of the Fed.”

Peter also talked about the fact that the Fed basically admitted that inflation is going to go a whole lot higher. Powell said the Fed would need to see a “really significant” and persistent move up in inflation before considering rate hikes. Basically, Powell conceded that the Fed wasn’t going to be vigilant about inflation. It is willing to let the genie out of the bottle. The question then becomes, how will it ever get the inflation genie back in the bottle? In short, it won’t. Think about what it took for Paul Volker to put the inflation genie back in the bottle in the 1980s. We saw 20% interest rates. Can you imagine that in this debt-riddled, overleveraged economy?

The only key is when is the market going to wake up to this game, this con. When are they going to realize the box the Fed has put itself in? That it is completely impotent when it comes to inflation-fighting? That it is all bark and no bite, and it basically, it’s not even barking yet? It’s only talking about the prospect of barking in the future, but it will never bite. And when the markets figure this out, the bottom is going to drop out of the dollar. Gold is going to absolutely go through the roof.”